VGK Vanguard FTSE Europe

Over the past few months, broader European ETFs have been surging higher despite several macroeconomic as well as political headwinds. This is especially true for the iShares MSCI Italy ETF (EWI) which had been on an upward trajectory over the past few months as indicated by the upward rising support line in the chart.

However, this brief uptrend was not sustainable as political instability injected fear in the minds of the investors once again. Italy recently witnessed elections following which the Italian ETF EWI plunged about 5.8% on the day the election results were announced (see Italy ETF Plunges on Election Chaos).

If this wasn’t enough, there was chaos in the European stock exchanges over the following trading session on renewed fears about another leg in the European crisis.

EWI was one of the worst performing ETFs for February, which has plunged almost 12.4% for the month (read Best and Worst Performing ETFs of February). However, looking at the short term chart of the ETF it finally seems that the ETF has managed to find a bottom.

After a breakout below its upward rising trading channel, the ETF has tanked massively which was triggered by above average volumes. In fact, the volumes saw an up tick recently especially compared to previous patterns.

The ETF has lost around 9% after breaking below the 50 DMA line (blue) which previously was the support line for the ETF (see Is the Italy ETF Doomed from a Technical Look?). And it is trading within striking distance of its 200 DMA line (green) currently.

This 200 DMA is a very strong support for the ETF. Previously EWI had rebounded off the green line in mid November (encircled portion) and had carried on a fresh surge upwards.

It has come back to that level now after the vicious sell off that EWI has witnessed of late. And given the chart pattern of the ETF, this most likely seems to be the bottom.

This is primarily because all the negativity surrounding the ETF seems to have been priced in and discounted by the market at its current level. Furthermore, the sell off has made valuations more realistic (which were surging and disproportionate a couple of months ago) and justified the present state of affairs of the economy.

Also, the Williams R and the Relative Strength Index hint that the ETF has for long been in the oversold territory and its sell off might just have been a bit overdone. The RSI has a value of 33.84 and the Williams R shows a reading of -90.67 which signifies a deeply oversold state (read More Trouble Ahead for Italy and Spain ETFs?).

It is also noteworthy that the ETF is on the verge of forming a double bottom at the $12 mark which might be the platform it needs for a fresh surge upwards. This is especially true given the flush of liquidity induced by central bankers across the globe which has welcomed risk taking among investors.

Also, compared to other developed markets, the equity prices in Italy are currently at subdued levels, mainly thanks to the recent fear-induced sell off. This may also be the trigger for a buying opportunity.

However, further negative news could surely hit the ETF hard and scrap any possibility of a fresh surge upwards. We are maintaining our Zacks ETF Rank of 4 or ‘Sell’ on this troubled fund, thanks to the weak long-term outlook and terrible momentum.

For this reason, the ETF may be an intriguing play for short term traders, but for those seeking a longer term investment, other European ETFs are probably a better choice, even at this time.

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ISHARS-ITALY (EWI): ETF Research Reports
 
ISHARS-SPAIN (EWP): ETF Research Reports
 
VIPERS-M EUROPN (VGK): ETF Research Reports
 
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