Intermediate-term Weakness Ahead for Germany Index ETF

May 7, 2010 - 12:00 AM EDT

While everyone is fixed on Greece (for good reason), why don’t we look at the pattern developing in the German equity market, just to keep an eye on the country within the EU that is on the hook for the lion’s share of money to be loaned to the PIIGS. After all shouldn’t the health of the creditor nation’s equity index be telling?

Purely from a technical perspective, the 14-month chart pattern of the iShares Germany Index Fund ETF (NYSE: EWG) depicted by the enclosed graphic shows a 7-month uptrend juxtaposed against an 8 1/2-month top. In fact, we can make the case that the EWG’s rounded top formation is so formidable that my work is warning me to expect a potential parabolic downside round trip that first revisits the July low at 16.75 on the way back to the Mar ’09 low at 12.47. Yes, that is so difficult to believe, but that is what this picture reflects.

From an extreme near-term basis, however, I would not be surprised to see the EWG spend some time in a relief rally that grinds up towards 20.00 prior to resuming weakness towards new post-crash lows. If such a scenario unfolds, then it will be discounting forthcoming problems in Germany’s commitment to the rest of the EC – to put it mildly.

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