Brexit, Euro, Pound And Stocks—See Why Europe Is "Churning" And What's Next
In this new interview, Elliott Wave International's Global Opportunities Expert, Chris Carolan explains how the Wave Principle helps you navigate the recent uncertainty associated with European markets.
********
[Editor's note: The text version of this interview is below.]
Alexandra Lienhard: I'm Alexandra Lienhard for ElliottWaveTV, and today I'm joined by Chris Carolan, Elliott Wave International's Global Opportunities Expert. Chris is 30-year market veteran and the recipient of the 1998 Charles H. Dow Award. Hi, Chris, good to see you. It's been a while.
Now safe to say, over the last few quarters and even broadening out over the last few years, Europe has been a bit of a challenge. You have the Greek debt crisis, Italian banks, Brexit; both France and Germany have elections coming up -- and those are just to name a few. So Chris, how does the Wave Principle help you navigate the uncertainty associated with European markets, and what is it telling you going forward for European indexes?
Chris Carolan: Well, one of the benefits of the Wave Principle -- in fact, I think, the primary benefit -- is it helps you sort out markets that are in churning, sideways moves; what we call corrective moves. The markets that are in trends, strong trends – those we call impulsive moves. And the best opportunities are in the impulsive moves, especially the larger Elliott wave-degree moves. So, looking at Europe, looking at the big picture, it has been difficult. And the reason it's been difficult is that we've been in these corrective, churning environment that the Wave Principle identifies. And in some ways, on the bigger picture, it's been telling us to avoid this market -- because, until new trends develop, there really aren't as many opportunities.
Alexandra: Now, in a video you posted last week for your subscribers you said something really interesting that I wanted to quote you on. You said, "the dual nature of markets are really reflecting currency relationships." What do you mean by that, and why is it important?
Chris: Well, it's very important. What we're seeing is this: Markets have become much more sensitive to currency moves. I mean, [look at] the Brexit issue in Europe, and what that's done with the pound. To exaggerate the concept, which makes it clearer, I tell people that, in an extreme environment, if a currency were to go to zero, that country's stock market would go to infinity -- and investors still would do very poorly. That illustrates that this idea that really stock prices are in some ways relative to their country’s currency levels.
Alexandra: So Chris, along those same lines of sensitivity to currency moves, in that same video I just referenced, you also noted that a weaker euro often props up the stock market. Can you explain that and talk about how you incorporate that idea into your analysis of the European markets?
Chris: It's very interesting. Right now, we're seeing the euro weaken -- therefore, in terms of other currencies, that hurts their stock prices, but it holds up those other markets, relatively. Let's look at two European markets: The British stock market and the British pound. The pound is even weaker than the euro these days. And if you look at the UK stock market, it's stronger than the continental markets. Now, on the flip side of that, look at the Swiss market. The Swiss pound is stronger than the euro right now, and the Swiss stock market is weaker than its neighboring continental markets. Noting these currency relationships is important, because it really gives us a clue to how the relative equity markets will perform.
Back to my earlier point about impulsive and corrective markets, the euro had been in some ways trading sideways in what we call a triangle for months. Now it's starting to break down, and it has begun transitioning from that corrective environment into an impulsive move to the downside. So, for outside investors, people who aren't in Europe, if you were to invest in Europe, even if the European markets hold up relatively, you're not going to do well. What we're also focusing on is not just the European indices, but the ETFs. Which, in dollar terms, in those markets they reflect both the equity prices and the underlying currencies, and so we do see some opportunities there.
Alexandra: Well, safe to say with everything coming up down the pipeline in Europe, I'm sure we'll be talking again soon. Thanks.
Chris: Thank you.
Chris Carolan is a pioneer in his field and 1998 recipient of the Charles Dow Award for excellence and creativity in technical analysis.
Get more financial insights like these -- 100% FREE. Just follow this link >> http://www.elliottwave.com/wave/TM