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French stocks gained more than 4% Monday after round one of the French presidential elections narrowed the field to two candidates. Based on the huge lead in the polls by the pro-European Union Emmanuel Macron over his far-right opponent, Marine Le Pen, most markets let out a sigh of relief and risk-taking returned to the fore. The euro jumped a very hefty 1.5%.

This column is not about politics, so we’ll stick with what the markets tell us via the charts. Right now, there are three concerns for investors, and they favor the U.S. stock market.

Though the euro jumped significantly, it remains in a short-term trading range within an overall weak trend, using the CurrencyShares Euro Trust exchange-traded fund (ticker: FXE) as a proxy (see Chart 1).

Chart 1

It is true that the short-term range has an upward bias, but the ETF is now bumping up against a rather important resistance level in effect since last October. That suggests there will be a lot of supply waiting to come out soon to quash the rally in its tracks.

Looking at trends in the euro versus the British pound and the Japanese yen as well as the U.S. dollar, Monday’s jump in the euro is still a one-day wonder and has not really changed anything just yet.

French stocks, as represented by the Paris market’s benchmark CAC 40 index, scored a huge gain Monday but are now at major resistance from their April 2015 high (see Chart 2). While this index enjoyed a steep rally from the middle of last year, it is possible that the jump up Monday formed a bearish condition called an “exhaustion gap.”

Chart 2

A gap is an area on the charts where no trading takes place as prices must jump to correct big supply-and -demand imbalances. After a strong rally, a gap up could signify a final push as all remaining bullish fuel is used up.

The problem is that it will take a few days to find out if this is the case. Regardless, the index is now at resistance levels, and that leans bearish until proven otherwise.

To be sure, we could also make an argument that Monday’s jump was a bullish move, based on a different time frame. If we look back on the chart to the all-time high set in 2000, we can draw a line connecting it with the 2007 and 2015 peaks. With Monday’s jump, the index poked its head above that line. It is still preliminary, but it is something to consider.

I am not so sure I want to bank on a one-day move in a 17-year pattern, especially since the final French election is still two weeks away.

Domestic investors can track the near-term moves of the French market via the iShares MSCI France ETF (EWQ). Note that due to currency fluctuations, the long-term charts of the ETF and the CAC 40 index do not show similar trendlines—though they do show similar resistance levels from 2015.

Other markets made small moves Monday, apparently related to “risk on” beating “risk off” in investor sentiment. Junk bonds rallied, while high-grade corporate and U.S. Treasury bonds fell. Gold eased back a bit, and even the Japanese yen fell. The latter has been the “safety currency” in recent years, even more so than the dollar.

And that brings us to the domestic market, where the Nasdaq Composite broke out of its two-month range to a fresh all-time high. The Dow Jones Industrial Average broke out to the upside from its two-month corrective decline, and that may have ended its recent bout of weakness.

Last week, I wrote here that there was plenty of short-term risk, but a breakout from this correction would avert a more serious decline. I did, however, say it would be predicated on movement on tax reform in Washington. With President Donald Trump saying he will present a plan on reform later this week, I wonder if this domestic market breakout is actually dependent on France at all.

But that is not for me to decide. For now the charts of the euro and French stock market are at resistance. Domestic stock indexes from the Standard & Poor’s 500 to the Nasdaq to the S&P 400 midcap index all have short-term breakouts. It is hard to argue with that.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

Comments?E-mail us at online.editors@barrons.com

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