In recent years, and especially in recent months, a confluence of events and circumstances has led to much-reduced expectations for economic growth in Italy. While we agree that the Italian economy offers many reasons to worry in the long term, our charts suggest that equity in Italian companies has swung into undervalued territory. Here we examine charts for the popular iShares MSCI Italy ETF (NYSEARCA:EWI), which we believe is oversold on a monthly time frame.
With a raft of bad European news, the Italian stock market may actually be undervalued. Let’s dig in.
During the past two years, market confidence in Italian companies has declined relatively more quickly than it has done for the Eurozone as a whole. The disparity has widened during 2016, resulting at least in part from growing recognition of the poor quality of loan assets held by Italy’s banks. In the weeks since the Brexit vote, Germany’s hard line regarding the idea of bank bail-outs or the creation of a “bad bank” for troubled loan assets has pushed sentiment even lower. (For readers who would like more context, a recent article in The Telegraph summarizes the competing interests that are forcing a decision.)
Translated into the very condensed language of Elliott wave patterns on charts, the Italian stock market (via the iShares Italy ETF – EWI) has been pushed about as low as it can go without transitioning into a new, even less stable condition. That’s why we believe now is the right time to watch for a possible bounce.
After the market crash in 2008, price action for EWI played through a series of three-wave moves with the net result taking the fund sideways within a converging range. Since the initial rebound in early 2009, the pattern almost certainly has been corrective, and the specific formation suggests a corrective triangle. If that interpretation plays out, then the pattern for the Italian ETF should present at least one more three-wave move upward before bears are able to take control again.
iShares Italy ETF (EWI) – Monthly Chart
If the pattern truly is a triangle, then the limit for EWI’s near-term decline is 9.21, corresponding to the fund’s 2012 low. Beneath that level, we would have to assign a different interpretation. Also, beneath that level the decline could accelerate due to stops being hit. On the other hand, there is an attractive Fibonacci support area just above that price floor, near 9.81. June saw that support tested, and we are watching for a possible bounce from there.
If bulls are able to bid EWI up from the June low to complete the triangle, then likely targets for the move would be in the vicinity of 15.20 or 16.40.
The weekly chart below shows some upward targets that are closer. Regions near 13.46 or 14.42 could bring an end to the first part of an expected three wave move higher for the Italy ETF. (An especially powerful sub-wave (a) could take price as far as the 15.71 region, but we think that is unlikely.)
iShares Italy ETF (EWI) – Weekly Chart
The dominant 75-week cycle shown on the weekly chart above also offers some approximate guidance for when to expect the waves to complete. The present area corresponds to a low in the cycle, and upward wave (a) of [e] of the triangle might continue into the early part of 2017. Eventually, the final part of wave [e] might continue into 2018, after which the bears could come back in force.
You can find other predictive charts like these in our July email bulletin, which will focus on European stock indices in the wake of the Brexit vote. Request your copy via this link.
Thanks for reading.
Further Reading: Â British Pound: Post-Brexit Bounce
Twitter: Â @TradingOnMark
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
