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Vive la France 40!

The upcoming French elections have attracted a lot of comment. Some see the rise of the far right, and others the far left. New scandals and investigations flourish almost daily. Polls predict a swing to one candidate one day, and a swerve in the opposite direction the next.

Of course, for traders, the key question is how the election results will affect the markets, with predictions ranging from the collapse of the Euro, to the extreme of France following the UK and embracing “Frexit” - a French withdrawal from the European Union. The French economy is a significant part of the European Union and any collapse of this market could of dire consequences for the strength of the Eurozone.

I have no crystal ball. But the recent history of two major events - Brexit and the election of US President Donald Trump - suggests that the pollsters and pundits can get election results very wrong. However, that doesn’t stop us predicting potential market outcomes. To do that, we draw on the trader’s best friend - the chart. And the index charts tell a very interesting story.

In the daily chart of the France 40 above, we can see the market has been in an uptrend for quite some time, and keeps advancing higher with dominant buying momentum. If we turn our attention to the recent price action, we can see that the market has found resistance around the level of 5,145. Let’ s mark that level in … 

Now I’d like to take a look at the higher timeframes, let’s jump to the monthly chart and zoom out on the price action. We can clearly see that the 5,145 level has become a well-defined and very strong level of S/R, which has been tested numerous times over the past decade. Now let’s zoom in and take a close look at recent price action on this monthly chart. Looking at the moving averages, we can see they are all fanning and all in the correct order, indicating a strong longer-term bullish momentum. However, we are currently quite over-extended from the buy zone, which is defined as the area between the 10 and the 20 period moving averages. And we could expect a pullback into the buy zone in the context of the monthly chart, while still maintaining the uptrend on this higher timeframe. 

So to summarize, the French 40 Index has had a strong bullish move, it is over-extended from its MAs, and is currently sitting beneath an S/R level that has been tested several times in the past. This combination of technical information suggests a higher probability of a pullback from this S/R level to the area between the 4,700 to 4,800 area in the near term. This healthy pullback could see a change of trend on the daily chart which would be seen by many as a bearish outlook overall for the French economy – to traders it would just be a normal part of a trend.

Traders can’t predict the future. But with technical analysis, we can look for probabilities based on repeated patterns in the market, and can assign odds to each possible scenario in order to guide our trading decisions. In the case of the French elections, uncertainty reigns supreme, one thing is certain however, the French people will retain their love and patriotism for their beloved country no matter the outcome, it, them and their economy will ultimately prevail.

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