European stocks have turned mixed after a weaker start. At the time of this writing, the FTSE was up 0.4%, IBEX up 0.1% while the DAX remained 0.3% in the red. However, it remains to be seen whether this kick-back rally can be sustained amid all the uncertainty about the future membership of Greece in the Eurozone. The resilience of the markets suggests investors are confident that a deal will eventually be reached, perhaps as soon as this week, which is also our base case. However, are investors being too optimistic? With another round of collapsed talks, we think that the odds of Greece actually exiting the Eurozone has increased but this is probably still below 50%. Thus, it could be that the risks are under-priced and the markets complacent. If the unthinkable happens, the markets may therefore stage a more profound correction than would otherwise be the case. However if Greece is saved, we also think that the potential upside could be significant, for after all some of the major indices such as the Euro Stoxx 50 are lagging behind considerably and may therefore have a lot of catching up to do. In any case, the ECB’s bond buying programme as well as the record low and negative interest rates should help to support the equity markets in the long term. There have also been signs of economic growth in the Eurozone lately while sentiment has improved, too. The latest 53.0 reading on the German ZEW survey, for example, was a sharp improvement from 48.4 in January. Thursday’s release of the ECB policy meeting minutes, as well as the manufacturing and services PMIs on Friday could lend additional support to the markets. However all of these will be overshadowed by the outcome of the Greek situation.
The Euro Stoxx 50 is in consolidation, awaiting news regarding Greece. The overall technical setup is still bullish, however, and will remain that way until proven wrong. This is highlighted, for example, by the rising 50 and 200 daily moving averages and also the bullish trend line. These moving averages are now in the ‘correct’ order following the crossover of the 50 above the 200 SMA; this is also known as a “golden cross.” Following the breakout above these averages in mid-January, the index has gone on to break above the 3305/25 resistance region (the upper end of this range was the 2014 high). This area has since turned into support.
But at the start of this week, the Euro Stoxx index has drifted slightly lower after hitting the 127.2% Fibonacci extension level of the entire 2014 range, at 3450 (i.e. this is the extension of the swing from point A to B on the chart). Interestingly, the RSI has also created a negative divergence, suggesting that the bullish momentum may be weakening. The RSI divergence here points to a possible correction, although for this to come to fruition it will probably require something extraordinary to happen – such as a Grexit.
Despite the RSI divergence and the slight weakness at the start of this week, the near-term technical outlook on Euro Stoxx will remain bullish for as long as it holds above the 3305/25 support area on a closing basis. Indeed, the tight consolidation below the 61.8% Fibonacci extension level of the 2007-2009 bear trend at just shy of 3500 suggests the index may be gearing up for a potential breakout soon. If seen, the next stop could well be around the 161.8% Fibonacci extension of the AB swing, at 3630/5. It is also worth keeping an eye out for resistance at the 161.8% extension level of a separate price swing (i.e. CD) at 3507.