Unless you've been living under a rock, you will have noticed that European stocks are on a tear today. The Greek stock market is up a cool 7%; Germany’s DAX is up some 3.5% while the UK’s FTSE, which is less exposed to Greece, is underperforming with a gain of ‘only’ 1.2%. In truth, this is a relief rally above anything else given the recent sharp sell-off. Traders are betting that a deal for Greece is finally forthcoming – if not today at the emergency EU summit, then at some point this week. At the weekend, new reform proposals were submitted by Greece, which apparently included, among other things, plans to scrap early retirement options from next year and an increase in income tax for high earners. The proposals, if confirmed, are more in line with the creditors’ demands which is why traders are showing so much optimism that a deal will be agreed this time around.
But are investors getting ahead of themselves? After all, unlike the stock markets, the euro has barely responded and is actually trading slightly in the red after gapping higher at the open last night. In fact, the European Commission President Jean-Claude Juncker has said that he doesn’t “know if we will have an agreement today,” while the Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem has said that he hasn’t assessed the Greek proposals yet. So, we could see stocks pause for breath at these levels or, worse still, go in reverse later in the session as the bullish euphoria fades.
Technical outlook: Euro Stoxx 50 trying to break out of bear channel/bull flag
Among the major European indices, we are looking the Euro Stoxx 50 index today. As can be seen on the chart, the index is hovering around key resistance at 3575-3590. This is where the upper trend of the short term bearish channel meets the 100-day moving average and the prior resistance. Understandably, traders are showing some reluctance to increase their bullish bets near this technical juncture given that a deal for Greece has not yet been agreed. But if a deal were to be reached later on today or otherwise optimism thereof increases, then a potential breakout could be on the cards. If seen, the next immediate target for the bulls could be the 61.8% Fibonacci retracement level of the sell-off from the most recent multi-year high of 3835, at just shy of 3660. Beyond this level is the May high at just below 3700 and then the 78.6% Fibonacci retracement at 3736. But the rally could go far beyond those levels given the on-going support from the ECB and other major central banks in Europe (i.e. quantitative easing and virtually zero or negative interest rates). Also, from a technical point of view, a major continuation pattern would emerge: a breakout from the bull flag.
If, however, the stock market sentiment turns sour once more – say as a result of a lack of deal for Greece – then the Euro Stoxx 50 could head back towards short term support at 3500. And if this level is taken out then a move towards the lower end of the bearish channel and the 200-day moving average, at 3365, would become highly likely. The key long-term support is around 3300/25, which was a sturdy resistance zone last year and so could turn into support upon re-test.