The European financial sector, as represented by the iShares MSCI Europe Financials ETF (EUFN), has underperformed the primarily US based Financial Select Sector SPDR Fund (XLF) by nearly 22% over the last three years. This year, however, European financial shares have outperformed their US counterpart by 3.5%. The chart of the EUFN is one to watch for an opportunity to catch the next leg-up in the financial space.
The weekly EUFN chart shows the fund spending all of 2016 forming an inverse head and shoulders pattern, below neckline resistance in the $17.75 area. It made a decisive breakout from that base at the end of 2016, and followed up this year by making a steady series of higher highs and higher lows with improving money flow.
In July, the fund broke above $22.32, which had been the previous all-time high made in 2015. It moved up to the $23.50 level and began trading in a narrow horizontal channel below that resistance level and above the 2015 high resistance-turned-support level.
Money flow has backed off but is still strongly positive and moving average convergence/divergence is still tracking above its centerline.
The chart suggests two potential entry points. First, would be after a pullback to the channel support line which is intersecting with the 40 week moving average. This entry level would allow for a close initial stop loss, just below the average. Another entry point would be after an upper candle closing break above channel resistance, using a trailing percentage stop.