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European Stock Markets Holding Their "Breadth" for Good News
One oscillator has helped European Short Term Update stay ahead of key, near-term price extremes.

By Nico Isaac
Thu, 27 Dec 2012 16:15:00 ET
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Every year around this time, investors act a lot like teenagers waiting anxiously by the mailbox to receive their college acceptance letters. A thin letter: Bad news. A thick packet: Good news. 

But instead of finding out their future alma mater, investors find out their year-end stock returns.
With just a few days left on the calendar, market goers across the pond have received a very thick packet indeed.
To wit: In early December 2012, the regional benchmark Euro Stoxx 600 index enjoyed its biggest annual rally since 2009 to set a new, intraday high for the year.
Now that the Euro Stoxx 600 has been accepted into "Bull Market State," the question is: Does the index have the brains -- or brawn, rather -- to cut it there for the long term?
According to a recent MarketWatch article, the answer depends on a slew of external factors.
"There are few things that will determine how much more the market will look to rally into the year end; namely, the fiscal cliff developments, sovereign downgrade risks, and expectations that growth in the UK and eurozone is starting to improve." [emphasis added]
There's just one problem with this popular news-moves-markets approach; namely, over the past year, such external data has been about as effective at determiningthe Euro Stoxx 600's near-term turns as a broken compass.
Let's go back to the beginning.
In November 2011, European markets were weakening. The Euro Stoxx 600 index was near a 29-month low. And according to the mainstream experts, the slew of negative macroeconomic data coming in and out of the Continent was set to clinch the downtrend.
"The situation for Euro denominated stocks is a good deal worse than [expected]. There's precious little in the charts to suggest that a bottom in place. Valuations don't work when you've got such extreme uncertainties." (Reuters)
"We're still in the eye of the storm. Investors are concerned about the two-tiered economies, such as Italy and Greece" (Reuters)
At the same time, Elliott Wave International's European Short Term Update was using a time-honored momentum oscillator to establish a bullish wave count for the Euro Stoxx 600. On Nov. 25, European Short Term Update presented the following chart and commentary of the market versus the Pan-European 5-day Advance/Decline oscillator.  
A very small bullish divergence has formed in the breadth oscillator. This divergence is consistent with the positive signals in some intraday charts today. It looks like next week will at the very least begin with a rally attempt.
On Nov. 30, European Short Term Update raised the bullish stakes with this commentary:
The surge in the 5-day European breadth oscillator is consistent with the early stages of a new, intermediate-term move higher.
The four-month-long rally that followed took the Euro Stoxx 600 to multi-month highs before pausing in late March. Once again, with the market kissing the 270 level, the mainstream experts reached into their fundamental bag and pulled out a 13-digit reason to stick to their bullish guns.
"European stocks cap their best first-quarter since 2006 as European finance ministers set the overall ceiling for the rescue of the region's indebted nations at $1.1 trillion. Finally robust firewalls have been established. This comprehensive strategy has paid off and led to a significant improvement in market conditions." (Bloomberg)
But according to the March 21 European Short Term Update, not even "robust firewalls" could keep the Euro Stoxx 600 from reversing.  The Update included the following chart and commentary of the Euro Stoxx 600 versus the same Pan-European 5-day A/D.
The bearish divergence in the breadth oscillator appears to signal the end of the 5-wave rally in the Euro Stoxx 600 Index. The oscillator supports our view that some indices are now presenting bearish opportunities. Now we need to see the oscillator plunge to a reading significantly beneath -500.
On June 1, European Short Term Update presented the following chart, which shows how both the Euro Stoxx 600 and the oscillator fulfilled their Elliott wave script; the latter indeed "plunged significantly beneath -500." The Update set the stage for a resumption of the upside. 
The breadth oscillator has moved well into negative territory once again. But the oscillator also remains above the May lows, which suggests a bullish divergence could form on any reversal. That potential is consistent with our view that many indices are now within a fifth wave decline from the March highs.
On July 14, European Short Term Update wrote, "Breadth continues to expand, arguing that stocks have sufficient upside momentum."
Of the "few things" that can determine the near-term trend in the European markets, objective Elliott wave analysis combined with tried-and-true technical indicators are without rank.

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