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European Stocks Optimism May Be Overdone, HSBC Says

Investor optimism on euro-area equities may be overdone as Elliott Wave analysis suggests that the rally since early June will end, according to a technical analyst at HSBC Holdings Plc.

“Sector-rotation evidence suggests that investors are becoming less defensive and more optimistic about European stock markets,” Murray Gunn, a technical analyst at HSBC in London, said in a phone interview today. “This is at odds with our Elliott Wave cycle count which remains bearish,” he said referring to the Euro Stoxx 50 Index.

The Elliott Wave is based on a theory developed by the accountant Ralph Nelson Elliott during the Great Depression and says that prices move in a pattern of five steps as part of one trend followed by three steps in the opposite trend. It contends that trends don’t move in straight lines and that they are prone to setbacks. In a five-wave move, waves number two and four are corrective.

Gunn said the index must break above 2,611 to negate the bearish scenario and start bullish trend in the short term.

“As long as 2,611 holds as a resistance level, the Euro Stoxx 50 has a bearish wave-cycle structure,” Gunn said.

The Euro Stoxx 50 has rallied 22 percent from this year’s low on June 1 as European Central Bank policy makers agreed on an unlimited bond-buying plan and the Federal Reserve announced a third round of quantitative easing. The measure has gained 8.8 percent so far in 2012. The gauge lost 1 percent to 2,520.58 at 1:32 p.m. in Paris today.

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

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