DAX stage set for a big move

Greece. We know you are probably sick and tired of hearing about it, and so are we, but this is exactly what all the focus has been on for the past couple of weeks. Unfortunately as no agreement was reached on Thursday, the Eurogroup has once again adjourned its negotiations on this issue and the plan is to meet again on Saturday. The German Chancellor Angela Merkel has said that “time is short,” and that European leaders have “agreed that everything must be done to find a solution on Saturday.” The IMF meanwhile still expects to receive the €1.6 billion payment it is owed by Greece on Tuesday.  So, there are still hopes that a last minute deal will be reached after all. But if no deal is achieved at the weekend then Greece could default come Tuesday. Given the highly uncertain outcome of the talks, the bulls are refusing to go into the weekend being boldly long – hence, the markets have pulled back slightly at the end of this week. At the same time, the bears are refusing to show their presence either because of the possibility that Greece will be saved, which could see the stock markets gap higher at the open on Monday. Due to this uncertainty, it is extremely difficult – if not impossible – to predict the direction of the European stock markets for early next week. The outlook is further complicated because of the impact of the euro which tends to correlate inversely with the European stock indices. The EUR/USD will also be impacted by next week’s high-impact data releases, not least the Eurozone CPI flash estimate on Tuesday and the US nonfarm payrolls data on Thursday – released a day earlier due to the Independence Day holiday on Friday.

Our technically-minded traders might want to pay close attention to the volatile German DAX index, which, depending on the outcome of the Greece talks, could move abruptly at the start of the week. The index has broken several resistance levels such as 11200 and 11360. The latter is currently holding as support, but if this gets broken down then the DAX may make a move towards the former. Beyond 11200, the next key support is all the way down at 10855, a level which corresponds with the long-term 38.2% Fibonacci retracement level. Thereafter is the prior low at just below 10800 and then the 161.8% Fibonacci extension level of the BC swing at 10690. While the index remains inside the bearish channel and below key resistance at 11600, the near term technical outlook would therefore remain bearish.

However if the DAX manages to break out of its bearish channel then a major rally could get underway. That’s because the potential bottom at just below 10800 has been formed near the relatively-shallow 38.2% Fibonacci retracement level of the long-term upswing. In healthy bull markets, a pullback to around the 38.2% Fibonacci level often precedes a rally that extends at least to the 127.2% Fibonacci level of the corrective move. In the case of the DAX, the 127.2% extension (i.e. of the AD swing) comes in at 12840. Now, that level is a long way away and as such it is a long term bullish target. In the more near-term outlook, the bulls will need to keep a close eye on the Fibonacci retracement levels of the abovementioned swing, at 11790 (61.8%) and 12060 (78.6%), which could offer some resistance.

In summary, going into the weekend, things are looking highly uncertain for the German DAX index and European stock markets in general. The bulls will require the DAX to break out of its bearish channel before more gains could be seen. Obviously a deal for Greece at the weekend could be the trigger, though the resulting buying pressure could still be relatively short-lived as some of the good news has already been priced in. Meanwhile, a particularly bad outcome for the stock markets would be if Greece fails to find a deal with its creditors this weekend. An even worse outcome would be if it defaults come Tuesday and worse still would be if it eventually exited the euro zone. Over the longer term however the European stock markets are likely to remain supported by the virtually zero interest rate policy and the on-going bond buying stimulus programme at the ECB.