I constantly read that investors should be diversifying into the European markets largely because Europe's recovery is lagging the U.S., which means the Continent will have the benefit of tremendous tailwinds (from the U.S.), especially as increasing numbers of Europeans get vaccinated.
At least that is the theory, if not the expectation for Europe's economy and markets.
While the analysts and strategists promoting the above viewpoint might be 100% correct, my near- and intermediate-term technical work suggest strongly that the pundits could be overly optimistic.
My daily chart of the iShares MSCI Germany ETF (NYSE:EWG) – which is the engine of Europe – shows that the June decline from its all-time high at 36.49 into last Friday's (6/18) low at 34.29 (-6%, or twice as deep as the correction in SPY) has pressed into the area of both the dominant intermediate-term up trendline off the March 2020 low, which cuts across the price axis in the vicinity of 34.50, and the up-sloping 100 DMA, now at 34.16.
Technically, it is imperative that any forthcoming weakness in EWG find significant buying interest at and above 33.90 to 34.30. If that zone is violated, EWG will be vulnerable to downside continuation to test the 200 DMA, now at 32.19.
Bottom Line: EWG is at a significant inflection point, either about to pivot to the upside off of the dominant 15-month up trendline into a new upleg that extends the powerful bull market, or on the verge of rolling over into a deeper correction that damages the bull trend and confirms the establishment of an April-June top.
I won't handicap the bull-versus-bear set-up, but let's keep an eye on EWG because its near-term behavior could impact U.S. markets, especially if the "Delta variant" of the COVID-19 virus sets Europe back, and expectations rise for its spread across the U.S.