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The ITA40 index is attempting to recover higher after three-days of heavy selling pressure, amidst news that the Italian Prime Minister Guiseppe Conte will step down and call for a new Italian General Election.
According to many political analysts Conte is hoping that the President of Italy, Sergio Mattarella, will give him an official mandate to form a new Italian government. This could be a risky move if it does fail.
The move by PM Conte is almost certainly seen as a tactical one, as Conte plans to form a new and stronger Italian government, following last week’s failure to find a majority in Italian senate. Markets may not be fully pricing the risks ahead.
With the recent recovery in the ITA40 index, it appears that the market is looking past any potential upcoming election defeat, and instead focusing on the prospect of a more stable Italian government if Conte wins.
Italian bonds yield, historically a major driving force behind price action in the ITA40, started to drop yesterday over the prospect of snap election. Again, the bond market is hoping that snap elections will cause minimal damage to the Italian economy.
Last Friday the gap between Italian and German 10-year bonds, which is effectively the risk premium on Italian debt, rose to its highest level since November 2020, sending the ITA40 reeling lower alongside the euro and other European equity markets.
As the ITA40 attempts to recover the short-term technical are also suggesting that the recent move lower could have been a force breakout. Also, medium-term analysis is suggesting that the ITA40 could still rally towards 2400, which is also surprising.
For me, the only red flag now is trading sentiment towards the ITA40. The ActivTrader Market Sentiment tool shows that some 72 percent of traders are long the ITA40 index. This is a concern and may indicate that traders are too optimistic towards the ITA40.
ITA40 Short-term Technical Analysis
The four-hour time frame shows that the index is trapped inside bullish descending broadening wedge pattern. Typically, these patterns are amongst the most reliable of bullish reversal patterns, and also explosive.
Technical analysis highlights that a false breakout below the wedge took place this week, however, bulls quickly move the price back inside the wedge. A recovery back towards the top of the wedge may now be on the horizon.
Source by ActivTrader.
According to the overall size of the wedge pattern the ITA40 could stage an 80-point directional move once a breakout finally takes place from this pattern. Overall, trading action around the wedge, which is located between the 2170 and 2250 levels will dictate the next big move.
ITA40 Medium-term Technical Analysis
The medium-term prospects for the ITA40 index look very good due to the presence of a large rising price channel. The pattern is located between the 2400 and 1900 levels.
I would expect that the ITA40 will gravitate towards the 2400 levels if short-term analysis is correct and indeed a break above the mentioning descending wedge finally takes place.
It should be noted that a major reaction could happen from the top of the channel. Watch out for an explosive reversal from the top of channel or a powerful breakout above the channel.
Source by ActivTrader.
