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STOCKS NEWS EUROPE-'Bearish divergence' shaping up on indexes

Reuters - UK Focus

Charts show a bearish technical pattern shaping up on a number of euro zone indexes including the blue-chip Euro STOXX 50 (Zurich: ^STOXX50E - news) benchmark, which could signal the start of a pull-back in the next few days after a sharp three-month rally, technical analysts warn.

The 'bearish divergence' between the positive trendlines of the Euro STOXX 50, France's CAC 40 (Paris: ^FCHI - news) , Spain's IBEX and Italy's FTSE MIB (Milan: FTSEMIB.MI - news) and the negative trendlines of their respective relative strength indexes (RSI)- formed by recent lower highs - usually signals exhaustion and potentially a trend reversal.

Similar divergences are also appearing with other momentum indicators, such as the MACD, warns Michael Riesner, UBS (Berlin: UBRA.BE - news) head of equity technical analysis.

"From a pattern point of view, we have all the ingredients in place for a top building," Riesner writes in a note.

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"However, a reversal is not yet in place so that a test or even a temporary overshooting above 2,900 (for the Euro STOXX 50) is potentially on the agenda. Former resistance at 2,855 now defines a new key support since a re-break would generate a 'sell' signal."

The indexes have gained between 16 to 20 percent since late June. The Euro STOXX 50 is up 0.5 percent at 2,906.70 points on Thursday, having earlier hit a fresh 2013 intraday high of 2,908.02 points.

FXCM (NYSE: FXCM - news) analyst Vincent Ganne says that although there are signs of exhaustion following the sharp gains, the RSI divergence signals are not very clear and that the rally may not be about to derail.

"A lot of chartists are flagging the divergence as a bearish signal, but it's not a textbook example of divergence, and the overall positive trend is very strong, with the DAX (Xetra: ^GDAXI - news) hitting a record high, so I don't think we're about to see a reversal in European indexes," the chartist says.

Reuters Messaging: blaise.robinson.thomsonreuters.com@reuters.net