The European stock markets are continuing to lose ground as investor worries over China intensify. Such is the level of pessimism that the DAX has even taken out the low it hit in July when the Greek crisis 2.0 was at the forefront. Admittedly, some of the sell-off can be explained away by market noise as more and more buyers are forced to exit their positions and fresh sellers come into play to take advantage of the momentum. But if it is indeed just noise then we will need to see the indices turn around and create reversal patterns on their charts by the close of play today. Otherwise, the path of least resistance would remain to the downside, particularly as key supports have now broken down – and not just in the stock markets.
As mentioned, the DAX has broken below the July low; the UK’s FTSE has taken out its long term bullish trend line and is falling for the eighth consecutive day, which is its worst streak since November 2011. In the US, the S&P 500 has closed below its 200-day average after several failed attempts from the bears in recent weeks. What’s more, WTI crude has clearly broken its low from earlier this year due to the relentless growth in supplies. Should oil prices head further lower then this could weigh heavily on energy stocks in the days to come.
One potential source of support for the stock markets may come in the form of record low interest rates for longer. The FOMC’s meeting minutes that were released yesterday revealed the Federal Reserve was already less hawkish than expected in July. Given that CPI grew only marginally in July and other deflationary pressures have since developed, mostly notably from the renewed selling pressure in crude oil and China’s decision to sharply devalue its currency last week, the Fed is highly unlikely to raise rates in September and may even hold off in December if price pressures recede further.
That being said, the sentiment is downbeat at the moment and the momentum is clearly to the downside. This points to further weakness for the global stock indices, such as the DAX. The German benchmark has already broken below its bullish trend line and the 200-day moving average around 11,000. And if holds below the 10650/5 pivotal level (where it had found strong support from in July) then a continuation towards 10,000 could be the most likely outcome.
The area around the psychologically-important 10,000 is a major support zone. As can be seen from the chart, the 9,900-10,100 area was formerly resistance and so could turn into support upon re-test. In addition, the point D of an AB=CD pattern completes there. What’s more, there are two key Fibonacci levels coming into play around 10,000: the 161.8% extension level of the corrective up move in July at 9940 and the more significant 61.8% retracement of the up move from October at 9900. Thus the probability that the market could find a base around 9,900-10,100 area is high. But will we get there in the first place? If the index turns around and closes back above the 10650/5 level then it may instead rally back towards 11025 resistance area before deciding on its next move.