These Charts Could Point to Further Highs

One of the technical analyst teams we follow closely is JC Parets, Chartered Market Technician (CMT), and All Star Charts. All Star Charts is a technical analysis blog that attempts to forecast future price movements using historical market price data. JC helps us evaluate technical patterns across important markets and asset classes, and we are looking forward to sharing more of his research on our blog.

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WisdomTree has historically been focused on value, dividends and quality, so our research tends to comment on valuation discounts and fundamental trends across global markets.

We also recognize that momentum has been one of the strongest factors , according to academic literature, and that technical chart patterns (based on historical market price data) and fund flows carry a lot of information about the direction of the market.

The All Star Charts team, led by JC Parets, CMT, is looking at markets all over the world, priced in both local currency and U.S. dollars.

JC often uses gold as the denominator, as well as other indexes to analyze relative strength. It’s one giant web of money flow.

Can Technical Indicators Signal a Revival Overseas?

Recently, JC has focused on a divergence in global markets that has, in the past, coincided with important turning points.

Specifically, we at WisdomTree are looking at divergences in two WisdomTree currency-hedged exchange-traded funds for the European and Japanese equity markets: the WisdomTree Europe Hedged Equity Fund (HEDJ) and the WisdomTree Japan Hedged Equity Fund (DXJ), respectively.

These funds are designed to represent their markets priced in local currency terms as opposed to most other traditional, unhedged ETFs that typically have exposure to both:

1. Foreign currency movements relative to the U.S. dollar
2. Their local equity markets.

Figure 1 shows HEDJ breaking out to all-time highs recently.

As JC has noted, when was the last time you could say the words “Europe” and “all-time highs” in the same sentence with a straight face?

Figure 1: HEDJ Reaches All-Time High in Late 2019

For standardized performance of HEDJ, please click here.

While some analysts may assume that new peaks portend a major price reversal, JC comments that all-time highs ”are not characteristics of downtrends. New highs have historically preceded even higher highs.”

JC believes that HEDJ’s price may be able to continue even higher toward its 161.8% Fibonacci retracement levels near $83.

But What About Japan?

We don’t think Japan is too far behind.

Both Japan and Europe are sensitive to a bottoming in sentiment toward global trade fears and global growth dynamics.

The chart in figure 2 certainly does not show as clean a breakout higher as in Europe, but JC believes the base and potential are both there.

Figure 2: DXJ Has Room to Run

For standardized performance of DXJ, please click here.

JC writes: “When Europe had a higher high and diverges positively versus Japan, the S&P 500 [Index] and stocks around the world start to rally. This just happened again.”

The Technicals Provide Optimism for Equities

The All-Star Charts team has been bullish on stocks because the overwhelming weight of technical evidence points to higher stock prices. They believe buying stocks has been and will continue to be more rewarding than selling them.

There is no holy grail of technical indicators, and the charts above do not pretend to be it. JC comments:

But when things like this keep adding up, pointing toward much higher stocks prices, it’s hard to ignore it, and it’s even harder to bet against it.

Think about it like this. If the people claiming the world is coming to an end are right, do you think European stocks would be breaking out to new highs? Heck no! They’d be right up front leading the global march to zero.

So when the gloom and doomers have their day, and their two weeks of fame, you’ll see it being priced into these charts above. Today, the money flow is suggesting the complete opposite.

The technicals could possibly point in favor of HEDJ if it is above $69.

Unless otherwise stated data source is All Star Charts as of November 15, 2019.