DAX at key technical juncture as Greece saga drags on

European stocks started the day on the back foot before turning flat by mid-morning session. Although FX traders have responded decisively to the outcome of the FOMC meeting and Yellen’s press conference by dumping the dollar, equity market speculators have not shown any clear enthusiasm to buy stocks. The message the Fed tried to convey last night was that economic conditions are still not quite right for a rate increase and that future hikes may be slower and as ever data-dependant, though a lift off in September is still likely. Janet Yellen re-iterated that monetary policy will be assessed meeting by meeting and that the importance of the first rate hike should not be overstated. In normal circumstances, the prospects of US interest rates remaining low for longer would have lifted equities across the board. Although shares on Wall Street did gain some ground last night, they eventually ended the day with only small gains. There was no follow-through in buying pressure overnight in Asia or early morning in Europe. Here, the investor sentiment continues to remain downbeat due to the growing uncertainty over Greece as the cash-for-reforms impasse between Athens and her creditors drags on.

But as mentioned, stocks have now bounced back a touch, possibly due to profit-taking as the major indices such as Germany’s DAX tested key technical levels.  Bearish speculators are probably wary of some potentially good news for Greece from today’s Eurogroup meeting, even if that looks unlikely. They are also aware that once sentiment improves, European markets could surge higher because the longer term outlook for stocks remains bullish due to the ECB’s current ultra-loose and unconventional monetary policy stance and also the potential for a sharp rebound in economic growth, among other factors.

Although the DAX may be in the official correction territory as it is down more than 10% from the record high of 12400 hit in April, the German index is still up more than 30% from the low of 8350 hit in October. It has now entered a key area of support between 10690 and 10855. The upper end of this range corresponds with the 38.2% Fibonacci retracement of the upswing from October, while the lower end is the 161.8% extension of the last notable and short-lived upswing we saw in May (i.e. of the BC swing). Not only does the 161.8% Fibonacci level mark a potential exhaustion point for the bears, it also represents the point D of an AB=CD pattern and thus a Bullish Bat/Gartley pattern, too.  Making it even more intriguing is the fact that the point D comes in right at the support trend of the bearish channel, though this will partly depend on the speed of the index’s potential drop to this level. But that is if the DAX gets there in the first place, because as mentioned, the index has already reached the upper end of the support range so it could bounce back from any level now.

If the index does eventually find good support from here and go on to break out of the bearish channel then the long-term technical outlook would look very supportive – mainly because of this relatively shallow pullback. After all, a 38.2% retracement in a bull market is very healthy. But that is a consideration for the time when the outlook is decisively bullish. At the moment though, sentiment is quite bearish and the sellers appear to be in control. The DAX, therefore, remains in danger of heading much lower – particularly if the situation regarding Greece deteriorates. Also, it could be that the abovementioned support range offers only intermediate support in what could turn out to be a long term bear trend. So it is important to remain objective. Just because the index has pulled back x per cent or reached a “key technical area” it does not necessarily mean it will or should stage a significant rally. But what it does mean however is that the probability for a bounce back is higher here than at some random price level because a large number of traders would be watching these key technical levels.  Additionally, these levels could be the profit target for some sellers. Meanwhile if the index fails to find support at 10690 (point D), assuming it will get there in the first place, then a continuation towards 10,000 or even 9,900 could get underway.