The European stock markets are sharply higher today even though last night’s talks between the Greek finance minister and his Eurozone counterparts ended with no agreement. As another meeting is scheduled for Monday, this means that the so-called “Grexit” risk may remain in place for at least another few days. As such, traders may exercise caution for the remainder of this week by holding back from some of the riskier assets. That said, the investor sentiment has been soothed by news that a cease-fire has been agreed between Russia and Ukraine, though effective a day after the Valentine’s Day. Nevertheless, this has helped to lift Russian stocks today and the positivity has found its way into the wider European markets.
The DAX is clearly in an upward trend. Today it has broken back above resistance at 10775 and is currently trading at 10920. It is therefore just 80 points shy of 11000. Ahead of this psychological level are two Fibonacci extension levels in close proximity to one another. The first one is the 200% extension level of the downswing from December, while the next on is the more important 161.8% extension of the bear trend of the 2007 crash, at 10985. As can be seen on the chart, this area has already offered some resistance at the start of this month following the upsurge in January when the ECB announced QE. The pullback from that area has ‘only’ been about 390 points. Although this may sound a lot, but putting things into context, it is not much at all. For example, a pullback of 390 points from the high represents a retracement of about 22% from the December low, thus even less than the smallest Fibonacci retracement of 23.6%. This means that the buyers may still be in full control of things and that this recent pullback may have been mainly due to profit-taking rather than short selling. If this view is proved to be correct then it could also mean that the next leg higher could be explosive as it would prove many bears wrong and encourage fresh buying.
If and when the DAX clears the abovementioned resistance levels, some of the next bullish targets could be those displayed on the chart:
- 11100: 161.8% Fibonacci extension of the AB swing
- 11225/30: 161.8% extension of EF swing
- 11518/20: 261.8% extension of CD swing
As before, the key support levels are 10775 and 10550. If these levels break down then we may see a more profound correction. But for the reasons just mentioned, the probability of a breakout appears to be greater than that of a breakdown.