Stocks trim losses

European stock markets started this last day of the month and quarter sharply lower as concerns over Deutsche Bank intensified, which undermined sentiment in the financial sector once again. Deutsche shares tanked nearly 9% at the open and hit a new 33-year low. Investors were concerned by news that some hedge funds have begun to pull their business from Germany’s largest lender.

However, as the morning session wore on, European indices started to bounce back as Deutsche shares moved north of €10 again. This was probably in response to a note chief executive, John Cryan, wrote to his staff, in which he insisted the bank had a strong foundation as he attempted to soothe concerns. There was probably also an element of “bargain hunting” going on as some believe that comparisons of Deutsche Bank with the fall of Lehman Brothers is clearly off the mark, as after all authorities are now much better prepared to deal with a banking crisis, not to mention the high levels of liquidity reserves the former has.

The rebound could also be explained by a technical rebound when looking at the chart of the DAX index and specifically at the 10190/5 area. As can be seen from the chart, this is where the backside of the broken bearish trend line that had been in place until early August converges with the 38.2% Fibonacci level against the low from June. It is likely that around here was many sellers’ profit targets and the bounce could therefore be partly driven by profit-taking on those bearish positions.

The buyers may now return if they sense weakness from the sellers at this critical juncture such as a failure for the DAX to hold below this month’s earlier low at 10265. If the index starts to move north of this level and holds there for a while then we could see a sharp rebound. Conversely, if the bears defend 10265 then we could see the onset of a deeper pullback.

Should the bulls win the battle here, then they may aim to ‘fill’ the gaps that have been left behind following this week’s earlier sell-off. As per the chart, there’s not much resistance seen now until 10370, the low from Thursday. Above this level and then the bulls may aim for the next gap between 10575 and 10625. While at this stage those targets look like they are miles away, the moves in the DAX can be explosive at times.

Conversely, if the sellers hold the index down below the abovementioned support at 10265 then a pullback to the next support at 10090 would be their first objective. Below this level lies the 200-day moving average at 10020, followed by the 61.8% Fibonacci level at 9820.

Source: eSignal and Please note, this product is not available to US clients

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