Investors seemingly went through the full cycle of emotions on Monday as optimism over Spain’s bailout plan in the morning gradually turned to skepticism, paving the way for a steep sell-off on Wall Street in the final hours of trading. David Kelly, chief global strategist at J.P Morgan Funds, commented on the proposed plan, “While this aid has little chance of stimulating Spain’s deeply recessionary economy, it does reduce the threat of a new wave of financial contagion emanating from the euro-zone debt crisis”.
Amidst the clouds of uncertainty, major equity indexes and crude oil prices slipped lower while gold drifted sideways [see also ETF Insider: Buy On The Dip With Caution].
With all eyes on the debt burdened eurozone, investors should keep a close watch on the iShares MSCI United Kingdom Index Fund (EWU) later today as U.K. industrial production data hits the street before Wall Street’s opening bell. Analysts are expecting for U.K. industrial production to have contracted by 1%, which would be a modest improvement from the previous reading which showed a contraction of 2.6% [see also Euro Free Europe ETFdb Portfolio].
Like most European equity benchmarks, this ETF has endured a bumpy ride to say the least since the October 4th bottom last year. Judging from the chart below, EWU has managed to drift higher since bottoming out at $14.04 a share. However, this uptrend has been fairly weak and range-bound; notice how this ETF has roughly oscillated between $15 and $17.50 a share over the past few months. What’s worrisome this time around is the fact that the fund has drifted towards its October 4th low while the debt drama overseas remains unresolved. From a fundamental perspective, this ETF may very well retest the $14.04 low in the coming weeks if uncertainty overseas continues to intensify [see also ETF Technical Trading FAQ].
On the other hand, establishing a long position at current levels is quite lucrative; nonetheless, we advise conservative investors to wait until EWU is back above its 200-day moving average (yellow line) for five or more consecutive trading days (depending on individual risk preferences) before establishing a long position [see also 3 ETFs For A Eurozone Double-Dip].
If the latest production data paints an optimistic outlook for the U.K economy, EWU could be in a for a big day. In terms of upside, the first potential resistance level for this ETF comes in at around $16.50 a share. On the other hand, a disappointing report could create even more headwinds for the already troubled United Kingdom. In terms of downside, EWU has support at the $15.50 level followed by $15 share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.