European stocks are lower for another day. Evidently, investors are continuing to reduce their long equity positions in the event that Greece defaults. At the same time, the selling pressure is only moderate at this stage because there is always the risk that a deal will be struck at the eleventh hour which could see the markets sigh a big relief. The sellers do not want to be caught out in this potential scenario. Traders are therefore on the edge, responding to literally every headline regarding Greece. But as time passes, the probability of a default increases proportionally, and this may cause the bulls to further lighten up their equity positions.
The Greek saga has clearly unnerved investors. The result of the latest ZEW German Economic Sentiment survey was released this morning and this showed a massive 10-point drop from the prior reading. It printed 31.5 versus 41.9 recorded in May, disappointing expectations for a 37.5 reading. Likewise, the Eurozone Economic Sentiment was down sharply to 53.7 from 61.2. The only thing that could save the wider global equity markets besides a resolution for Greece could be some dovish comments from the FOMC on Wednesday. Although this may help to underpin the EUR/USD, which would be bad news for European exporters, it may nonetheless soothe the overall stock market sentiment a little bit.
Technical outlook: FTSE
But for now, it is all about Greece and so the risks remain skewed to the downside. As a result of the recent sell-off, the FTSE has broken below several support levels. Each time a key level breaks down, more and more bullish speculators are forced out of the market while the bears grow in confidence. The latest key support to breakdown was the area between 6725 and 6745, where, among other things, the 200-day moving average comes into play. With the bulls losing control here, the index has potentially paved the way for further sharp losses. The last time the 200-day average was broken down decisively, on December 8, the index went on to fall for the subsequent five sessions without a hiccup. Will we see a similar move this time around?
As we go to press, the FTSE bears were trying – so far unsuccessfully – to take out the early April low of 6670. Evidently, some speculators are booking some profit here following a three-day sell-off. The RSI indicator suggests that the market is becoming a little bit over-sold in the near-term, and that the selling momentum may be slowing down. The RSI is in a state of bullish divergence as it has created a higher low relative to the underlying FTSE index, though for this to be confirmed, we do need a positive close today.
But so far, the buying pressure here does not appear strong enough to cause the tide to change. Thus, as things stand, the path of least resistance continues to be to the downside. If the 6670 support level gives way, then the next immediate target to watch is around 6635-45 where two sets of 161.8% Fibonacci extension levels meet (i.e. from the BC and DE swings). Beyond this area the next key Fibonacci level would be the 61.8% retracement of the upswing from the October low, at just below 6475.
Meanwhile the broken support levels could turn into resistance upon retest. As such, the abovementioned 6725-45 area could be the first hurdle the bulls will need to be wary of. If broken, a potential rally towards 6870 or 6900 could get underway.