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SMI May Drop 5.4% in Next Two Weeks: Technical Analysis

Stocks in Switzerland may drop more than 5 percent by the middle of February, after the benchmark Swiss Market Index climbed to a 4 1/2-year high on Jan. 28.

The equity benchmark could decline to 6,990 if it fails to break above a level of 7,518.47, said Ouri Mimran, a technical strategist at Natixis in Paris. That’s a drop of 5.4 percent from yesterday’s close. The resistance represents the 61.8 percent Fibonacci retracement of the decline from June 2007 through March 2009 during the financial crisis.

“The SMI is approaching a barrier that could hold in the coming sessions,” Mimran said. “A technical correction could take place. We’re targeting 6,990, which represents the April 2010 high. It’s also not far from the 50 percent retracement level of 6,891.”

The SMI has surged 8.3 percent since the end of December, posting its best start to a year since 1988, when the index came into being, as U.S. lawmakers agreed on a compromise budget and the Swiss franc weakened against the euro. Still, the gauge dropped 0.9 percent to 7,387.9 yesterday.

The SMI and its 14-day relative strength index, which measures how rapidly prices rise and fall, have diverged, indicating that Swiss shares will decline, Mimran said. The RSI reached a high of 83.35 on Jan. 17 and then failed to climb higher in subsequent trading days. The SMI set an intraday high of 7,457.65 on Jan. 18 and then extended its advance to 7,495.83 on Jan. 28.

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

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