Summary:

• SPA35 recovers following suspension of Catalan independence
• Price now at a potentially critical level
• Move above 10350 could signal major breakout

There’s been high levels of volatility in the Spanish stock market this month with the leading IBEX benchmark (SPA35 on xStation) falling sharply before recovering strongly yesterday. The fundamental reason for the wild gyrations is the independence referendum carried out in Catalonia on the 1st of October which saw 90% of voters support secession. The Spanish government in Madrid have stated both before and after the referendum that it was unconstitutional and therefore carries no legal power, but an attempt on their behalf to have the national police force prevent voters from submitting entries into the ballot box brought widespread outrage. 

Tensions between Spain and Catalonia have a long history and the recent events have threatened to spill over into a nasty feud. Catalonia is far from universal in its wish for independence – as shown by the hundreds of thousands who took to the streets of Barcelona, the Catalan capital, over the weekend to show their support for remaining a part of Spain.

Last night a hotly anticipated speech from Catalan president Carles Puigdemont in the regional parliament saw him first declare independence before stating that the independence would be suspended to allow for some mediation with Madrid. Whilst the fundamental backdrop remains potentially damaging, with Catalonia the wealthiest region in Spain and having a GDP approximately the size of Portugal, but their was sharp relief rally in the SPA35 yesterday evening as Puigdemont ended his speech. The main takeaway was that the Catalan president had softened his stance somewhat and in opening the door for mediation the chances of an amicable solution rose sharply. 

 Spanish 10-year yields spiked higher following the referendum but have since returned to their previous level. Source: Bloomberg

The longer term view of the SPA35 is particularly interesting now, with price once more testing a falling trendline from the 2017 peak of 11235. Tuesday’s high of 10350 was the highest price seen since the referendum was held and with this level coinciding with the aforementioned falling trendline a break above it would be seen as a major bullish development. 

 SPA35 could be on the verge of a major break higher. Source: xStation

The 8 and 21 period EMAs can be used to identify a trend with a bullish orientation (8 above 21) indicative of an uptrend. Going back to December 2016 when the market took off on a strong rally to the upside we can observe a bullish cross (8 EMA moving above 21 EMA) and this remained the case until the bearish cross (8 below 21) in June. Since the bearish cross the vast majority of the time price has been moving lower with a false bullish cross back in early August providing a fake signal. These two EMAs are now converging once more and may be on the verge of printing a bullish cross. A break above 10350 would likely be accompanied by a bullish cross in the EMAs and these could be seen as a strong positive development for the market and suggestive of further gains.