European Stocks to Rally Following Golden Cross

The Stoxx Europe 600 Index has formed a golden cross with its 50-week moving average climbing above its 100-week moving average, a pattern that suggests equities will rally, according to a technical analyst.

The Stoxx 600’s next resistance level lies between 275 and 280, Julius de Kempenaer, a senior technical analyst at Taler Asset Management Ltd. in Gibraltar, wrote in an e-mail. “Once this level is cleared, the next stop should be approximately 290 and after that there will be even more upside potential,” said de Kempenaer.

The 50-week moving average has climbed above the 100-week average on two previous occasions over the last decade. The benchmark measure rallied 65 percent following a crossover in April 2004 and 7.9 percent after the same event in April 2010.

The Stoxx 600 jumped 4 percent last week as optimism mounted that the U.S. Congress and President Barack Obama will agree on a budget, stopping automatic tax increases and spending cuts from coming into force early next year. The equity benchmark slipped 0.5 percent to 272 yesterday.

Technical analysts use golden crosses to confirm that equities will rally. They use death crosses, which occur when the 50-day moving average crosses below the 200-day line, to help indicate when they should sell shares.

“Today we see a golden cross,” said de Kempenaer. “But there was also a reverse crossing in late 2011. The actual price level of the index was pretty much the same back then and there was also not a huge decline based on the negative cross taking place. This indicates that the market is in a sideways pattern, which is visible even better when you look at the almost horizontal slope of the 100-week average.”

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

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