SMIM in an Ideal Set Up to Witness a Move on the Upside

By Mihir Gupta (UCL), Ameya Joshi (UCL), Sukrith Kumar (UCL), and Filippo Palacino (ETH Zurich)

Index Overview

Made up of 3 separate indices, the Swiss Market Index (SMI) family represents the 50 largest and most liquid stocks in Switzerland, consisting of SMI, SMI MID and SMI Expanded indices. SMI - the most important stock index in Switzerland, consists of 20 of the largest stocks from the Swiss Performance Index (SPI). These so-called ‘blue-chip companies’ are what make this index the most followed in the country. The stocks contained within the SMI represent 80% of the Swiss equity market capitalization, therefore the SMI is often considered as an accurate reflection of overall Swiss stock market performance. The index is updated once annually and the fluctuations occur in real time.

The top 3 companies, with the greatest weighting, hence largest market capitalization, in the SMI index, are as follows:

Table 1: Top 3 companies with the greatest weighting in the Swiss Market Index

The SMI MID index is similar in principle to SMI, however comprises the 30 largest mid-cap stocks that are not included in the main SMI index. As with SMI, the index is updated annually, however there is no limit for company weightings in the SMIM index. A maximum weighting is deemed unnecessary, given that the largest constituent accounts for less than 10%.

The top 3 companies, with the greatest weighting, hence largest market capitalization, in the SMI index, are as follows:

Table 2: Top 3 companies with the greatest weighting in the Swiss Market Index - Mid Price

Technical Outlook for the Index - SMIM

Support and Resistance Analysis

Graph 8: Support and Resistance Levels for SMIM ( as on 17/10/2020)

As on 16th October 2020, the Swiss Market Index-Mid Price closed at 2650.11, after having gained 0.58% by the end of the trading session. Ever since the index bottomed on 16th March 2020, it has been on a steady path to recovery. Although there came a brief period between 16th September 2020 and 25th September 2020, when the candlestick action broke the higher-high, higher-low formation, over the past few weeks the index seems to have come back in line with its bullish trendline. Having said that, as the fear of a second wave in Europe emerges - we may see trickle-down effects from the Swiss Market Index percolate down SMIM. Consequently, this could mean a certain level of correction or halted growth in the bullish trendline of the index.

As per our analysis, we believe that the index is trading close to its immediate support of 2,632 and the immediate resistance level for the index is at 2,700 (as shown by the yellow rectangles on the downside and upside in Graph 1). Furthermore, some of the other crucial levels in addition to the immediate support and resistance levels are 2,750 and 2,795 on the upside (as shown by the orange and blue rectangles on the upside respectively in Graph 1) and 2,600 and 2,550 on the downside (as shown by the orange and blue rectangle on the down side respectively in Graph 1).

Graph 2: Fibonacci Levels for SMIM ( as on 17/10/2020)

The strength of these levels, especially the ones established below the immediate support are further highlighted by plotting the Fibonacci levels for the index on a downward basis (as shown in Graph 2). As can be seen, the index has been hovering near its crucial 1.0 retracement level of 2,642 which has also been stated as the immediate support.

Graph 3: Runaway Gap and Bullish Harami formation for SMIM ( as on 17/10/2020)

One crucial point that we will like to highlight at this point is that, in our opinion, the correction that the index witnessed between 13th-15th September was meant to be a retest of the exact same level that it broke out (as shown by the blue arrow in Graph 3). This an aspect of candlestick behavior that is often witnessed after a majority of breakouts due to subsequent profit booking. In fact, as we enter next week’s trading session - both, an unfilled gap on the upside, as well as the current formation of a bullish harami, are indicators for a potential move on the upside (as shown by the orange and yellow boxes respectively).

Trend and Pattern Analysis

Graph 4: Trend Analysis for SMIM ( as on 17/10/2020)

Due to the COVID-19 pandemic, the index plummeted in March earlier this year, as with many worldwide indices, bottoming at a value of 1926.86. However, following this drop, the index has witnessed a significant trend reversal and a rising pattern over the last six months. In comparison with other indices, such as FTSE-100 and NASDAQ, the uptake has lasted longer, despite a few signals of exhaustion in May and June.

From March to July 2020, the index witnessed a bullish uptake constricted with a parallel rising channel ( as shown by black lines in Graph 4). But, this rising trend line coupled with a higher-high higher-low formation was breached at the beginning of August, thereby entering a parallel channel (as shown by yellow lines in Graph 4). Nonetheless, continuous testing of the then established immediate support and resistance levels resulted in another breakout. Ever since the index has been maintaining a bullish trendline, forming a higher-high higher low formation simultaneously (as shown by pink lines in Graph 4). In fact, provided that the index has already tested the lower bound of the rising channel, we believe it can witness a considerable move on the upside and in the most bullish case this may be up till the upper bound of the rising channel.

Graph 5: Ascending Triangle and Double Bottom breakout for SMIM ( as on 17/10/2020)

What furthers our case when it comes to this bullish outlook are the patterns that resulted in the breakout prior to the formation of the bullish trend line. As it can be seen Graph 5, the breakout in the first week of October resulted from the combination of an Ascending triangle as well as a double bottom, both of which are extremely strong signals for a bullish continuation.

Moving Average and DMI Analysis

Graph 6: 20-days and 5-days Moving Average and DMI Analysis ( as on 17/10/2020)

As highlighted in our previous reports, the 20-days and 5-days Simple Moving Average analysis is particularly useful in observing any significant crossovers that may have occurred in the recent trading sessions. Particularly so, because these crossovers allow us to get a sense of the direction of the candlestick movements using a combination of time periods. Consequently, as the situation currently stands, the index had witnessed an extremely powerful positive crossover (i.e. the 5-days MA line overtaking the 20-days MA line) emerge on 2nd October 2020 which it trailed 13th September 2020.

However, it was only until very recently that the candlesticks broke the trend and came down to test to 20-days MA, signaling a short term correction. As highlighted by us in our earlier reports, this testing of 20-days MA would not only have been embedded in trader expectations but was also healthy for the index. Reason being that this gives space for new investors to enter future trades and drive the index upwards. Moreover the very fact that despite the occurrence of such a correction, the candlesticks remained intact above the 20-days MA and did not breach it which in itself is a positive sign for a potential move on the upside in the coming week.

Under this analysis section, we have also included the analysis of the Directional Movement Index, which once again as highlighted in our previous reports gives us an into the buying and selling pressures in the index. As can be seen in Graph (), the red line i.e. the -DI line is above the +DI line highlighting that the selling pressure seems to be dominating the buying pressure. Although this observation is contrary to our overall expectation, further scrutiny of the indicator makes us realise that the selling pressure seems to be diminishing (as highlighted by the directional reversal of the -DI red line in Graph ) because of which we are hopeful for the bulls to enter.

RSI and Stochastic Analysis

Graph 7: Stochastic and RSI Analysis for SMIM ( as on 17/10/2020)

We would like to end with a note on the analysis of the Stochastic Oscillator and Relative Strength Index (RSI) of SMIM for a 14-day period. As for the Stochastic Oscillator, we observe that after having entered the overbought zone at the start of last week due to a brief bullish rally, the correction between 13th-15th October resulted in the indicator returning to the neutral zone of the Stochastic Oscillator. This in one sense is ideal from the case that there are no red flags being flagged at the moment that may obstruct another move on the upside as expected by us.

Lastly, in the case of the RSI, we observe that the movement of the indicator has long been in the neutral zone which in one sense is a validation to the point stated earlier about no red flags being present. However, interestingly, the indicator has been relatively dynamic in terms of its movements within the neutral zone as well. As it can be seen, the 49.5 level has been strong support for the index (as highlighted by the black line in Graph 7), which is currently tested and briefly bounced back from. This indicates to us that indeed there is potential for the index to move on the upside.

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