The Eurozone Breakup Portfolio

11/08/2011 10:45 am EST


Thomas Aspray

, Professional Trader & Analyst

German equities stand to benefit most from an (unlikely) split in the Eurozone, but prevalent risk factors further prove the importance of moving stops to lock in hard-earned profits.

Today is likely to be another pivotal one in the Eurozone debt crisis as the markets will not only be watching the vote in Greece, but also Italy’s key parliamentary vote on Tuesday afternoon.

The yields on Italian bonds hit a high of 6.76% on Monday but softened later on intervention by the European Central Bank (ECB). Of course, it is the spread between the Italian bonds and German bunds that the markets are really watching.

Italian stocks were actually higher on Monday as the market was apparently encouraged by the possibility that Italian Prime Minister Silvio Berlusconi might step down.

These developments have increased speculation that Greece might drop out of the Eurozone, while others are still questioning the viability of the European Union.

Though I still do not think a breakup is likely, I thought in September that such a split would favor Germany and made several recommendations to that effect. (See “Best Bets for a Euro Breakup.”)

Let’s now take a current look at those recommendations and adjust the stops as needed.

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Chart Analysis: SAP AG (SAP) is a $60 billion German business software company that competes with International Business Machines (IBM), Microsoft (MSFT), and Oracle (ORCL). SAP reached a high of $68.39 at the end of April.

  • In August and September, SAP dropped below $48.90 (the major 50% support from the 2009 lows) several times
  • SAP hit a low of $47.39 on September 23 but held well above the 61.8% support at $44.21
  • Daily on-balance volume (OBV) formed a bullish divergence at the lows, line c, and then broke through resistance. It is still in a strong uptrend
  • Weekly OBV (not shown) is positive and very close to the April highs
  • There is initial support for SAP at $58 with stronger support in the $55.60-$56.35 area

Fresenius Medical Care AG & Co. (FMS) is a $21 billion medical company that provides products and services for patients with chronic kidney diseases. In July, FMS traded as high as $80.08.

  • The chart shows a potential double-bottom formation that was supported by the move through resistance, line d, on October 21
  • The drop back below this support has been sharper than expected
  • Volume action does not support a double bottom, as there was no surge in volume on the breakout. The OBV is lagging prices and is below resistance at line e
  • Weekly OBV (not shown) is negative and below its declining weighted moving average (WMA)
  • Initial support is now at $68 with stronger support at $66.00

NEXT: Latest Chart Action for Two Primary German ETFs


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The iShares MSCI Germany Index Fund (EWG) represents a broad portfolio of German stocks, holding $2.5 billion in assets. EWG made lower lows in September and early October, line c, with an eventual low of $16.96.

  • The late-October rally took EWG up to the 50% Fibonacci retracement resistance at $23
  • The 61.8% retracement level and the daily downtrend, line a, is in the $24.50 area
  • Daily OBV formed a positive divergence at the lows, line e, that was preceded by a break of the OBV’s downtrend (line d)
  • The weekly OBV (not shown) is now positive
  • There is first support at $19.78 with further support in the $19 area, line d

The New Germany Fund (GF) is a closed-end fund that invests primarily in small- and mid-cap German companies. It has a market cap of just $220 million and is rather thinly traded, averaging about 45,000 shares per day. It is still trading at a discount to its net asset value.

  • GF has key resistance now at $15.30 (line g) and a move above this level should signal a test of the $17 area
  • Daily OBV moved through its downtrend, line h, near the lows after forming a slight positive divergence
  • Daily OBV is holding above its rising weighted moving average, and the weekly OBV (not shown) is also positive
  • There is first support now at $13.50 with further support in the $13 area

What It Means: The way these stocks and funds acted when they reached their major 50% retracement support levels reinforces the validity of Fibonacci analysis.

See related: Fibonacci Analysis: Master the Basics

In September, our least favorite pick was the iShares MSCI Germany Index Fund (EWG) and I would not recommend it now. For the others, it is time to lock in profits by raising the stop levels.

How to Profit: Buyers should be long SAP AG (SAP) at $47.54, as it held well above the original stop at $45.66. The position is now up over 28%. Raise the stop to $56.28 at this time and sell half the position at $62.15 or better.

Buyers should be long Fresenius Medical Care AG & Co. (FMS) at $67.14. Raise the stop to $67.86 and sell half the position at $72.20 or better.

Buyers should be long the New Germany Fund (GF) at $12.38. Raise the stop from $11.27 to $13.19 and sell half the position at $14.56 or better.

Our original recommendation for the iShares MSCI Germany Index Fund (EWG) to buy at $15.66 was not hit. Cancel the order at this time.

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