Opportunities in a Resurgent French 40 Index

Opportunities in a Resurgent French 40 Index

23 abril 2018, 04:37
Anderson Braga

Signal - Long on France 40 index as it moves back to bull trend with rising price momentum. 

The France 40 index can often be overlooked in favour of the Germany 30 and the EU stocks 50 indices, but in truth, that should not be the case. After all, French stocks are some of the biggest components of the pan-European index and the domestic French index could reasonably claim to be more representative of the Eurozone than the export-focused Germany 30. 

Over the last week, the French index has stepped into the limelight. As at the time of writing, it is up by +1.6% over the week, comfortably outperforming these peers and is now positive on a year-to-date basis.

President Emmanuel Macron is pushing through a series of much-needed reforms in the French economy. He aims to move away from its socialist, state-controlled and anti-competitive roots, and turn into a modern dynamic, competitive economy, that he believes could rival Germany in the longer term. These moves are not proving popular with vested interests, such as the railway workers unions who can see their member's benefits being quickly eroded by Macron’s reforms. But Macron was voted into power on a mandate for change and change is what he will try to deliver.

Industrial relations in France have often been volatile and confrontational. Strike action could well escalate across the spring and summer. In the past, unions have had the power to force governments to back down from reform agendas. Despite that risk, the markets seem to be getting behind Mr Macron's objectives.

That was evident as the France 40 moved back to bull trend in my midterm model this week (through 5350). The index closed above the signal price and has pushed on since then, justifying its strongest bull status. There have also been some other bullish indicators in the price action over the last few sessions in the shape of golden crosses between the 20, 50 and 200-day ema lines. The faster moving 20-period line is crossing up through its slower moving counterparts. This is often seen as a sign of rising (shorter-term) price momentum. 

The index also moved to and through an old gap resistance at 5365, and if it can move and close above 5400, that will be a further feather in its cap. The model has an aggressive price objective of 5950 for the index. However, we should focus on levels that are likely to be more obtainable in the near term. If we can make a move above 5400, then 5430/40 and 5470 (the bottom of a gap from January 5th) should be possible. There may even be sufficient momentum for a tilt at 5500. Though we should note that the area above here has been populated by failures, at and around 5540, over the year-to-date. 

We can see an uptrend line, in the chart above, that extends higher from the mid-Feb lows. That line currently comes in just below the 2nd of April low, at US $67.02, and the adjacent 50-day EMA line, shown in orange above. There is also horizontal support between $70.40 and $70.00 even. While all these items remain unbroken on the downside, there seems a strong likelihood of further gains in Brent Crude.

My midterm model has a price objective above $80 for the contract. That price objective was generated by a break back to Bull trend on April 9th, which was triggered by the move in Brent crude through $68.00 per barrel. 

Eighty dollars is an area that Brent has not been to since early November 2014. However, I don't think we can rule that out as a possibility under these circumstances. Not least because there is little resistance above current levels on the long-term chart; apart from $73.40 (a high in early Dec 2014). Ironically, the principal participants in this unfolding political drama would all benefit from a further sharp rise in Oil prices. Though, I doubt any of them would wish for a wider conflict as the catalyst for that.

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