Ride The Sell-off In Indices – Short IBEX 35

Ride The Sell-off In Indices – Short IBEX 35

Last week hasn’t been the best for risk assets, as most stock indices closed the week sharply negative. After the decent growth at the beginning of the year, it’s time to digest the gains. 

The decline coincides with the end of the historically most profitable 3-month period for stocks. On the other side, it’s a logical time for a correction to start as February is one of the worst months of the year for stocks historically.

In this article, we will look at the stock index that is the most appealing for the short-sale. Even if you are bullish on equities in the long-term, shorting weak instruments during correction phases can be a profitable short-term strategy. 

Why short IBEX 35?

As stocks are about to enter historically one of the worst months in terms of growth, no wonder last week closed negative. In the sell-off environment in stocks, we want to look for a relatively weak index to short. 

One of the best candidates for a short-sale is Spanish IBEX 35. Not only has it recently experienced one of the worst declines among peers, but it also has never reached pre-pandemic highs, which hints about the structural weakness of the Spanish economy.

Spain is one of the most sluggish economies in the European Union. According to the latest updates of the country’s economic indicators, YoY GDP and the Jobless rate are the worst in the EU, showing -9.10% and 16.13%, respectively. Spain also has one of the highest Debt levels to GDP in the EU, totaling 95.5%.

How do you identify the relative weakness in the index?

If you want to find out if an asset would “grow faster” or “fall sharper” than the rest of the market, you need to compare it to the peers on a relative basis. 

Below you can see the chart of the ratio of IBEX 35 versus EURO STOXX 50 (In this illustration, the CFDs represent their respective futures contracts stock indices). EURO STOXX 50 represents the 50 largest companies in the eurozone. So, we will roughly compare the performance of the Spanish market to the European market overall.

You can see the chart of the ratio of IBEX 35 versus EURO STOXX 50 (In this illustration, the CFDs represent their respective futures contracts stock indices)

You can see that for the last two years, the ratio has been in the downtrend. The ratio mainly stayed under the Moving Average (50) without violating major swings of the trend, which signifies that the trend is likely to continue.

Notice the periods when the ratio was dancing around the MA (50) (blue areas). Over the five occasions, the ratio declined the most after the prolonged consolidation periods that lasted from 68 to 79 days. Apparently, the last consolidation period has just finished, as the ratio sharply declined back under the MA (50), hinting at the beginning of the next relative weakness period in the Spanish index.

Technical setup in IBEX 35

The technical picture also offers a meaningful setup. The chart below shows that the market most vividly tested the 7663-price level in July. Later on, in November, the market broke out above the price level and tested it from above in November and December, forming mirror support. 

The breakdown of the level can accelerate further downward momentum. You can short-sell at the close of the daily candle below 7663 with the Stop loss above the candle’s high and the target around local low at 6500. The setup may offer the risk-to-reward ratio of 4:1.

IBEX 35 index chart

Conclusion

During the correction periods in the stock market, you can take short-sell positions in relatively weak indices to increase the odds of catching the most prolonged decline compared to other indices. In terms of performance, the Spanish economy is behind other EU countries. The chart of the ratio of IBEX 35 versus EURO STOXX 50 confirms the Spanish stock market’s relative weakness. IBEX 35 itself offers a reasonable technical setup to define the risk, provides a trigger to enter the market, and shows a decent potential reward.

Our Experts


Daniel Michelson

Daniel is a long term investor and position trader in the forex market.

Reva Green

Reva Green is the Senior Editor for website. An experienced media professional, Reva has close to a decade of editorial experience with a background.

Shandor Brenner

Shandor Brenner, an experienced writer at fxaudit.com, brings a wealth of knowledge with over 20 years in the investment field.

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