Europe Stocks May Drop If Head-and-Shoulders Completed

European stocks may decline more than 6 percent in coming weeks if the Euro Stoxx 50 Index completes a so-called head-and-shoulders pattern, according to a technical analyst at ING Groep NV.

A head-and-shoulders top is produced when price movements in a security form three peaks, the middle of which is the highest. The line that unites the troughs between the peaks is known as the neckline. The Euro Stoxx 500 (SX5E) had intraday highs on Aug. 21, Sept. 14 and Oct. 5, data compiled by Bloomberg show.

The Euro Stoxx 50, a benchmark for the euro area, is developing the bearish pattern with a neckline of 2,450, Roelof- Jan van den Akker said by phone from Amsterdam today. The broader Stoxx Europe 600 Index is also forming a similar trend, he said.

“If stocks hold up today, we may see a rally over the next couple of days,” Van den Akker said. “The selling action could come later if the index completes the head-and-shoulders pattern and goes below 2,450 on a closing basis.”

The Euro Stoxx 50 rose 0.6 percent to 2,470.36 at 12:46 p.m. in London today, extending this year’s advance to 6.6 percent. The index may fall as low as 2,300, 6.4 percent below yesterday’s close of 2,456.54, if the head-and-shoulders neckline is broken, according to Van den Akker.

Still, the outlook for stocks is positive for the rest of 2012, according to Van den Akker.

“I am not too bearish even if the index declines to 2,300,” he said. “That should be a short-term bearishness and investors should consider that a buying opportunity and expect a rally back up again.”

The analyst said he expects the Euro Stoxx 50 to end the year at 2,600 or “possibly higher.” That’s 5.8 percent above yesterday’s closing price.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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