Volkswagen (VOW3) is one of the leading automakers in the world. The group is present globally with its numerous brands, and this makes it a bellwether regarding economic growth on a worldwide basis.
Car sales have always been viewed as an indicator of growth with respect to how an economy is doing. This is because it offers a glimpse into consumer spending in various economies/regions, as well as purchasing power: both represent vital economic information.
Since €250/share printed in March of this year, but VOW3 chart shows a double top in that area and we know by now that double tops or bottoms are reversal patterns. Needless to say that now, the price is trading in the €160 area, and indeed the double top seemed to work like a charm.
What were the causes though for the stock price to fall in such a dramatic way? Especially when the ECB (European Central Bank) is injecting sixty billion Euros on a monthly basis through its quantitative easing program (and this has the effect of inflating the stock market). I mean, this happened in Japan and the United States, so it is only safe to assume it should happen in Europe as well.
One answer comes from the fact that China is slowing down, and as it represents a big chunk of Volkswagen’s sales, this influencing its revenues as well.
Another answer comes from the fact that the Euro as a common currency is starting to be seen as a safe haven. Volkswagen is a global player, therefore the turmoil in financial markets and a higher Euro should contribute to a decline in revenues as well.
Market participants seemed to have anticipated all of these and sent the stock price lower, but I would say it is only a matter of time until we see a bounce. The reason for this optimism comes from two different directions: oil prices and Iran.
Lower oil prices implicitly mean lower gasoline prices and therefore driving becomes more affordable than ever. One of the main drivers in the decision process when buying a car was consumption. With oil falling so much, this is not an issue anymore. Auto-makers can also focus on producing vehicles that offer a bigger margin because of that.
Moreover, now that China is slowing down and sales are being affected, Iran is opening up and we’re talking about a country with a population the size of Germany, and those people need basically everything. Stepping up in such a place would bring a lot of opportunities.
However, as promising as VW’s position is, the technical picture is bearish and I am favoring call options from the current 166 level with an end of September expiration date. If at the end of September, the price is above 177, it means the bearish channel is broken and we can expect some more to the upside.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
