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DAX hit by Grexit fears

As we reported the possibility on Wednesday, the DAX has indeed entered a consolidation phase following a sharp rally in January which came in anticipation and then response to the European Central Bank’s QE stimulus programme. The follow-up gains made at the start of this month have now been eroded, largely in response to the situation in Greece. The new Prime Minister Alexi Tsipras said in a speech on Sunday that he will not seek to extend the country's current bailout which expires on February 28. He said that the bailout had “failed” and had “destructive results.” Instead, he said Greece is pursuing a bridge loan until June. This would provide some breathing space to negotiate “a stable and balanced arrangement.” But with time running out and no deal in place, things may get really ugly for Greece and its days in the Eurozone could be numbered. What’s more China could be another source of worry for the market too, where imports plunged 19.9% year-over-year in January while exports also fell unexpectedly. Concerns over Greece and China are thus likely to deter investors from taking on too much risk, meaning the equity markets would do well to hold around the current levels in the near term. In the slightly longer-term, we still think a solution for Greece will be found, which, together with the help of the ECB’s QE programme, would support equities.

As can be seen on the chart, the DAX reached the 161.8% Fibonacci extension level of the 2007-2009 bear trend, at 10985, last week. That level marked an exhaustion point in the market, so regardless of the fundamental factors we were likely to see some profit-taking there anyway.  The important question now is what will happen next? From a purely technical point of view, there could be some more losses in the short-term now that the important support at 10775 is broken. The next area of support is around 10550/70 which was the prior low and the 23.6% Fibonacci level of the last upswing (from point D). If the index breaks below this area then we could see a more profound correction over the coming days, towards the 38.2% Fibonacci level at 10310. Beyond that level lies the key support around 10050/10100. This was a major resistance area last year and now that it is broken, it is likely to turn into strong support should we get there.  On the upside, the 10775 level could turn into resistance now. Further resistance comes in around 10985 (the previous all-time high) and then at just shy of 11100 (the 161.8% Fibonacci extension of the AB price swing).

Figure 1:

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