Is Greece Fixed, Again? (EFA, VGK, GREK, IEV, VWO)

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February 19, 2012 8:07pm NYSE:EFA NYSE:GREK

David Gillie:  Greece survives from media headline to media headline like a fading Hollywood starlet’s career. I quit doing the math when the “pledged” bailouts exceeded their total debt several times over.

The “China to Bailout Greece” headline is recycled every time the market needs a lift. Of course, there’s no story under the headline and no follow-up to show Athens in flames and the Greek Parliament rejecting the terms of the bailout.

The drama has no end. Now, Moody’s Rating Agency has done a widespread downgrading of debt in Europe. The IMF has essentially demanded the U.S. come up with more money to bail out Europe in spite of the fact that we can’t bail ourselves out.

Despite the calamity, or maybe just a sense of media fatigue, Europe appears to be muddling through—at least for the short term.

iShares MSCI EAFE Index (NYSEArca:EFA) is the most widely traded, broad base index of European stocks.

The holdings of iShares MSCI EAFE (NYSEArca:EFA) are mostly traded on European stock exchanges. However, many are also traded on the NYSE. The top holdings have all performed well over the recent past, but they only amount to less than 10% of the composition of this ETF. To get a better perspective of this ETF, we should look at the major sector distribution.

Financial Services comprises 18.94% of the holdings in EFA. Fluctuations in bond yields, bailouts, etc, affects the financial sector most of all. This has become highly volatile. However, any good news (or even no news) lifts this sector quickly. Industrials are 14.6% and basic materials are 10.2% of the composition of EFA. These are both cyclical growth sectors and amount to nearly 25% of the holding in this ETF. This is an area of concern. Most economists see Europe the least likely to have growth and recovery on the global scene.

In fact, Europe is the most likely to slip back into recession and these two sectors usually fare poorest in recessionary conditions. To a degree of balance, defensive sectors of consumer staples, healthcare and utilities are also 25% of the holdings in EFA. Consumer cyclicals are 10% and austerity measures go directly to that sector.

It would make an unreadable chart to plot all the media releases by Chancellor Merkel announcing Europe’s “save” and creating a gap up in the price of EFA. Only to be followed by some action by the Greek Parliament wiping it all out with another gap down. The irony on the chart is, over the past month while there haven’t been European salvation headlines; Europe has actually had a healthy move up.

One of the most important technical events on the chart is a double bottom setting a base. This indicates to us that although Europe may not be out of the woods, perhaps they’ve seen the worst of what was to come. In the quiet of media absence, EFA broke above the upper trend line resistance. Price further went on to achieve and hold the critical 200 day moving average for the first time in six months.

The Money Flow Index shows us that investors have held in their positions over the past month without getting spooked out on fearful headlines. Even over the past week when we saw selling in this position, volume indicates that it was not out of the ordinary profit taking.

We do have two indicators on the chart that give us near term directional concern, Stochastics and MACD. Stochastics has just crossed downward from overbought and typically will need to complete this cycle to the oversold level of 20 to draw in new buyers. Also, the MACD has just made a bearish crossover of the signal line and the histogram has turned negative.

Ideally, EFA would hold the 200 day moving average, but as volatile as this issue is, that support is unlikely. Also, with US markets in a precariously toppy condition, Europe will be dependent on the US market to hold up. The 50 day moving average hasn’t shown a reliable support, but it may coincide with a price support around $52.00 to give additional support at that level.

Europe is clearly a “risk on” position. As long as there is uncertainty in sovereign debt of the southern countries and media headlines moving European stocks, this ETF will remain volatile. We also have significant resistance in the $56.00 price area for a limited upside. Nevertheless, EFA could be a trader’s position from $52.00 to $56.00. A breakout of the $56.00 resistance could see highs of $60.00. EFA would be a position that would require close attention and well placed stops.

Related: iShares S&P Europe 350 Index (NYSEArca:IEV), Vanguard MSCI Europe ETF (NYSEArca:VGK), Global X FTSE Greece 20 ETF (NYSEArca:GREK), Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO).

Written By David Gillie For The ETF Digest

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds.  ETF Digest was founded in 2001 and was among the very first to see the  need for a publication that provided individual investors with  information and advice on ETF investing. Even if you’re not a fan of  chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

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