The ESP35, Spain's benchmark stock market index, is a popular choice for traders seeking short term investment opportunities. Keeping a close eye on the index's short-term trend can help investors make informed decisions on when to enter or exit the market. In this article, we'll explore the ins and outs of the short-term trend of the ESP35 and provide insights on how traders can capitalize on it.
What's the short-term trend of the ESP35?
The ESP35 is currently (at the time of writing) at its highest level in three years, a significant milestone since February 2020, though it still hasn't reached the pre-pandemic figures. At 9,428 points, it is considered a crucial psychological level, and investors are optimistic that the upward trend could continue towards 9,500 points.
The ESP35's short-term trend is usually determined by whether the price is above or below the moving average set for the short term (25 sessions). Moving averages are popular indicators that smooth the price curve by reducing volatility and provide a clearer view of price direction. They do not anticipate anything but rather confirm trend changes that have already occurred. Three arithmetic means of increasing periodicity are used to establish the relationship with closing prices.
In an upward trend, the closing price will be above the average of 25, which is above the 70 average, and the 70 above the 200 session average. The opposite would occur in a downtrend, and if the close is less than 1.5% above or below the average, the trend is considered sideways.
What are moving averages?
Moving averages are a widely used technical analysis tool that helps investors identify trends in the stock market. But what exactly are they? Think of them as a line on a chart that smooths out the fluctuations in stock prices over time.
To put it simply, a moving average is a series of averages of different subsets of prices over a specified period of time. Depending on the nature of the market being analyzed, it may be more advantageous to use long averages (100-200 sessions), while in others it may be more advisable to apply short averages (5-25 sessions) that are more sensitive to price variations.
To calculate a moving average, you simply add up a specific number of closing prices and divide by that number. For example, a 10-day moving average would take the sum of the last 10 days' closing prices and divide by 10. This gives you the average price over the past 10 days.
Moving averages can be used in a variety of ways, but their main purpose is to help investors identify the direction of a trend. When the price consistently remains above the moving average, it indicates an upward trend, whereas a price below the moving average suggests a downward trend.
Example: say you are analyzing a stock and notice that its 50-day moving average is rising steadily. This suggests that the stock is in an uptrend, and you might consider buying it. On the other hand, if you notice that the stock's price has fallen below its 200-day moving average, it could be a sign of a downtrend, and you might want to consider selling.
Short term trading vs long term trading
Short-term trading and long-term trading are two distinct approaches to investing in financial markets. The main difference between the two is the duration of the trades. The table below explains the difference between the two approaches:
| Short-term trading | Long-term trading |
|---|---|
| Short-term trading, also known as day trading, involves buying and selling securities within a short time frame, usually within a day or a few days. | Long-term trading involves holding securities for an extended period, typically months or years. |
| The goal of short-term trading is to profit from small price movements in the market. | The goal of long-term trading is to capitalize on the overall upward trend of the market and benefit from the compound interest of investment returns over time. |
| Short-term traders tend to trade more frequently than long-term traders. | Long-term traders may only make a few trades per year. |
| Short-term traders use different strategies than long-term traders. Short-term traders often use technical analysis and rely on price movements and market trends to make quick trades. | Long-term traders tend to focus on fundamental analysis and look for undervalued assets that have the potential to appreciate over time. |
| Short-term traders tend to have a higher tolerance for risk than long-term traders. Short-term traders are willing to take on more risk in exchange for the potential for quick profits | Long-term traders are more focused on preserving their capital and building wealth over time. |
| Short-term trading typically requires more capital than long-term trading. Short-term traders need to be able to cover the cost of multiple trades and may need to maintain a larger account balance to meet margin requirements. | Long-term traders can often start with a smaller amount of capital and build their portfolio over time. |
Related: Swing Trading vs. Day Trading – trading style guide
Top companies within the IBEX 35
Here are the top 10 companies in Spain within the IBEX 35 as of April 2023, in order of market capitalization:
| Company | Stock symbol | Market Cap (USD) | Industry |
|---|---|---|---|
| Industria de Diseño Textil | ITX | $86.45 B | Apparel retail |
| Iberdrola | IBE | $72.42 B | Utilities—diversified |
| Banco Santander | SAN | $50.99 B | Banking |
| Banco Bilbao Vizcaya Argentaria | BBVA | $37.72 B | Banking |
| CaixaBank | CABK | $33.24 B | Banking |
| Amadeus IT Group | AMS | $25.25 B | Information Technology Services |
| Naturgy Energy Group | NTGY | $25.18 B | Utilities—regulated gas |
| Cellnex Telecom | CLNX | $24.07 B | Telecom services |
| Telefónica | TEF | $21.96 B | Telecom Services |
| Repsol | REP | $21.65 B | Oil & Gas |
Capitalise on volatility in index markets
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What to expect of the ESP35 in 2023
In April 2023, the ESP35 stock market index increased to 9,428 points, a significant gain over the previous month of 9322 points.
Revving up the stock market with their phenomenal performance, the banking giant Banco Santander (ES:SAN) and the tech sensation Amadeus IT Group (ES:AMS) have outdone themselves by delivering a whopping 20% year-to-date gain. Surpassing the 12% return of the esteemed ESP35 index, which comprises the most traded stocks in Spain, these two companies have earned a solid "Buy" rating from seasoned analysts and show no signs of slowing down.
Tips for traders when trading indices
Here are some tips for traders who are trading indices:
Keep an eye on market news and economic indicators
Indices are influenced by various factors such as global economic conditions, political developments, and market trends. Traders should stay informed about the latest market news and economic indicators that can impact the index they are trading.
Diversify your portfolio
Indices provide a diversified exposure to a market, which can help traders reduce risk. Traders can spread their investments across different sectors and indices to minimize the impact of a single event on their portfolio.
Use technical analysis
Technical analysis can help traders identify patterns and trends in the market, which can assist them in making trading decisions. Traders can use charts and other technical indicators to analyze the index they are trading.
Set stop-loss orders
A stop-loss order is a risk management tool that allows traders to limit their losses by automatically closing their position when the price reaches a certain level. Traders should use stop-loss orders to minimize their losses and protect their capital.
Keep emotions in check
Trading indices can be stressful, and it is essential for traders to keep their emotions in check. Fear and greed can lead to irrational decisions and cause traders to make mistakes. Traders should have a solid trading plan and stick to it, even during periods of volatility.
Understand the risks involved
Trading indices involves risk, and traders should be aware of the risks involved before investing their capital. It is essential to have a good understanding of the market, trading strategies, and risk management techniques to minimize the risk of losses.
Conclusion
With the right knowledge and strategies, traders can navigate the market and capitalize on the volatility that the ESP35 index provides. If you are still feeling quite lost, you can start by following these trading strategies and understanding the risks involved so as to develop a solid trading plan that suits your goals and risk tolerance. With perseverance and discipline, you may achieve your trading objectives.
Past performance does not guarantee or predict future performance. This article is offered for general information purposes only and does not constitute investment advice.
