Technical Analysis FR40 : 2016-06-28

Brexit weighs on French stocks
FTSE 100 stock market index plunged on Friday having opened with a sharp gap lower after the UK referendum decision to leaving the European Union. The French economy accelerated in the first quarter of 2016 but the added uncertainty of EU breakup and the negative impact of recent strikes against controversial labor reforms are expected to result in lower growth rate for the economy in future periods. Will the CAC 40 index continue falling?
France’s CAC 40 tumbled 8% to 4106.73 on Friday as Britain voted to leave the European Union. European countries account for two third of France’s exports and the United Kingdom ranks the fifth in the list of top export partners for the French economy. The British referendum decision to exit from EU added uncertainties to both the UK and EU economic outlook which accounts for the steep losses in all EU market indices. The French economy expanded in the first quarter 0.6% quarter over quarter, accelerating from the 0.4% growth in the Q4. The growth was driven mainly by strong private consumption and investment. The recent economic indicators were positive: industrial production expanded 1.2% in April over the previous month after an 0.4% contraction recorded in March, the consumer confidence index jumped from 94 in April to nine-year high of 98, and the composite Purchasing Managers’ Index (PMI) also rose in May. The economic growth is expected to slow due to negative effects of wide protests by labor unions following president Hollande’s approval by special decree in May of a labor reform bill aimed to liberalize the French labor market. The protests involved blocking oil refineries and shutting down nuclear power plants, which resulted in transportation disruptions and lower power generation. On June 28 a lower consumer confidence index for June is expected to be released, on June 30 a marginal increase in headline inflation for June is expected to come out after no change was recorded in CPI in May. And on July 1 and July 5 June Manufacturing and Services PMIs will be published, both are expected to show contraction in respective sectors.


On the daily chart CAC 40: D1 had been rising after hitting a 20 month low in mid-February. It started retracing about two weeks ago as polls indicated rising chances for Brexit. The price then rebounded, rising back above the 50-day and 200-day moving averages MA(50) and MA(200) as Brexit fears subsided. The price opened with a large gap on Friday following the shock of Brexit vote, breaching below the fractal low and the support line of the uptrend. It closed 8% lower. The price opened with a gap on Monday too, staying below the MA(50) and MA(200). The Donchian channel is tilted downward indicating downtrend. The Parabolic indicator gives a sell signal. The MACD indicator is below the signal line and the gap is rising with the signal line itself below the zero level. This is a bearish signal also. The RSI oscillator is edging lower but hasn’t yet reached the oversold zone. We can go short right away. Risks can be limited by placing the stop loss above the last fractal low at 4100.00 and support line which has become now a resistance line. After placing the limit order the stop loss is to be moved every day to the next fractal high, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level (4100.00) without reaching the order (4026.06) we recommend cancelling the position: the market sustains internal changes which were not taken into account.
PositionSellSell limitbelow 4026.06Stop lossabove 4100.00