SINCE last week, Spain’s Ibex 35 has shown a Golden Cross, a pattern whereby the 50-day moving average crosses above the 200-day moving average. When short-term moving averages rise above longer-term moving averages, this Golden Cross pattern usually anticipates higher prices. Conversely, when moving averages cross below longer-term ones the pattern is known as Death Cross, and is usually indicative of falling prices to come. The key is to figure out which moving averages to use in combination. Since 2007, there were five patterns of Golden and Death Crosses in the Ibex 35. Each of the patterns successfully predicted declines and rallies respectively. The two cases of Golden Crosses since 2007 were in June 2009, when a 50-200-day moving average crossover preceded a 35 per cent increase over seven months; and in February 2011, when a Golden Cross preceded a 0.7 per cent increase over four months. The three cases of Death Crosses since 2007 were as follow: January 2008 (a Death Cross preceded a 54 per cent decline over a 14 month period); March 2010 (a Death Cross preceded a 24 per cent decline over a three month period); June 2011 (a Death Cross preceded a 44 per cent decline over a 13 month period).As the ensuing Golden Cross in the Ibex 35 takes hold, it could well predict the inevitability of Madrid seeking assistance from the EU/IMF. In this case, the European Central Bank’s Outright Monetary Transactions boosting Spanish bonds would also be beneficial for Spanish shares.The Ibex 35 may be down 10 per cent year to date, but up 28 per cent off its July lows. The latest monthly reversal gave way to a break-out above the 16 month trendline. An extension towards the 9,000 territory is not ruled out for the end of the fourth quarter, as long as the required support for the index holds at 7,500.
Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: www.cityindex.co.uk/market-analysis