All trading involves risk. Losses can exceed deposits.

IBEX 35 on track to break above resistance

Price at time of writing - 8376

Spain's benchmark equity index, the IBEX 35, bottomed out in July 2012, having completed a fall in excess of 60% from its all-time high four-and-a-half years earlier.

All trading involves risk. Losses can exceed deposits.

This low, formed around the important G4 level on my chart, is likely to prove a major historic low. Today I explore the likely future path of the index. 

Unlike other leading equity indices, Spain's IBEX was unable to hold its low of March 2009. The depths of its economic despair and financial bail-out required the index to re-test, and indeed penetrate, this low some three years later. I will ignore in today's note, therefore, the percentage analysis leading up to July 2012. Last week's economic reports were upbeat in terms of the Spanish context, suggesting an economic low-point may also be upon us. Official reports from the Bank of Spain estimate the economy shrank by just 0.1% in the second quarter, and were coupled with statistics showing Spain's chronic decline in employment has also been arrested. As we know, stock markets like to factor in turnarounds like this well in advance.

The initial rally from last year's low was capped at 33.33% – an area on the chart which also aligned with significant resistance that came courtesy of the G1 level, a line representing 50% of the all-time high. This advance was then consolidated with a three-month period of sideways trade. By December 2012, the IBEX had pushed through the stubborn G1 level of 8020, proceeding to form an interesting (albeit minor) triple-top over the following six-month period of trading. Notably, on each set-back during this time, the G1 level held firm. We are now approaching the highs of this trading band on a fourth attempt. Gann-theory dictates that a break above resistance on a fourth attempt is often the most potent and powerful of all.

I have two alternate trading scenarios to consider. The higher-risk approach is to buy the index now, assuming that it will duly break through its resistance at 8665. An alternative strategy, offering a lower level of risk, is to buy the index only following a break above 8665. The rewards for a break above 8665 will be a powerful rally to a target band defined as 11,730-11,810.

Recommendation: risk-tolerant investors and traders should buy the index now. Ultimate target 11,810. Profit-taking opportunities will occur along the way at 9435 and 9841. Stop-losses can be activated on momentum beneath 7870.

IBEX 35 index chart

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