DAX, Ibex and Euro Stoxx 50 forecast: European indices continue to power ahead

It has been another positive day for European equity markets. The major indices continue to trade with a constructive tone, with several benchmarks either testing record highs or moving within striking distance of them. A combination of easing energy costs, not-so-bad economic data and expectations that central banks may be nearing the end of their short-lived, energy-driven, tightening bias has provided a supportive backdrop for risk assets. While concerns around global growth have not disappeared entirely, investors appear increasingly comfortable rotating back into equities, particularly across continental Europe where valuations remain attractive relative to some international peers. We maintain a bullish DAX forecast after the Ibex and Euro Stoxx 50 both broke out.

 

 

Lower energy costs provide a tailwind

 

One of the key drivers behind the recent rally has been the sharp drop in energy prices. Much softer crude oil prices compared to just a couple of weeks ago have helped ease concerns over inflationary pressures across the eurozone and the UK.

 

For equity investors, this is music to their ears. Lower energy costs not only improve profit margins for businesses but also reduce the likelihood of additional monetary tightening from major central banks like. The market narrative has therefore shifted away from inflation or stagflation fears and towards the prospect of a more stable macroeconomic environment.

 

Technical analysis: Euro Stoxx 50, Ibex and DAX

 

Euro Stoxx 50 breaks out

 

The Euro Stoxx 50 Index has staged a key breakout above 6,200 area of prior resistance and has held above that level since. Previously, the index was consolidating inside a continuation pattern— namely, a flag-like pattern —before staging a breakout.

 

 

The index has already been making a series of higher highs and higher lows, holding for the most part above the 200-day moving average and the 21-day exponential moving average. The fact that the index is holding above both of those moving averages provides a clear indication that the trend is indeed strong, and we could potentially see further gains in the days and weeks ahead.

 

The key question now is: where do we go from here?

 

Given that the index is trading at all-time highs, we could use Fibonacci extensions as our guide. The 127.2% extension of the most recent significant downswing comes in at 6,424. So, that will be the next upside objective. The 161.8% extension comes in at 6,709.

 

Keep an eye on yesterday’s high at 6288. If we can hold there, then we could see accelerated gains moving forward. Else, if the index enters a mini correction phase, then the key level now is the resistance level that was taken out during the rally at the start of this week, around 6,200.

 

Below that zone, 6080/5 area is where we have the 21-day exponential moving average converging with last Wednesday’s high, which was engulfed by the big rally on Thursday of last week. That makes it the most important support to watch.

 

Ibex could head to 20K

 

The Spanish IBEX Index is powering ahead after breaking through 18,470-18,570 resistance area a few days ago, and it hasn’t looked back since. Given that this zone was tested multiple times before the breakout, any pullback to this area could be defended in the future, making it the most important support zone to watch on the IBEX moving forward.

 

 

In terms of resistance levels, there aren’t many because we are trading at all-time highs. We can plot our Fibonacci extension levels, and you can see we’ve just moved above the 127.2% extension. The next Fibonacci-based target, namely the 161.8% extension, comes in at around the psychologically important 20,000 mark. That could be the next upside objective in the days and weeks ahead.

 

To get there, we will need to see continued favorable conditions in the equity markets. So far, that’s proving to be the case, with oil prices falling back and rate-hike expectations being pared back as well.

 

DAX still on course to head to 26K

 

The German DAX Index is looking quite strong, and I think a break to new all-time highs could be on the cards fairly quickly. The index is now finding good support from weaker oil prices and is trying to establish a base around the 21-day exponential moving average, having reclaimed it and moved back above the 200-day moving average after a brief breakdown in recent days.

 

 

The all-time high comes in at 25,512, which was hit back in January. It looks quite likely that the index will at least retest this level, especially given that some other European indices have already broken out. With US markets remaining at or near all-time highs, expect the German DAX Index to follow suit and break through this level in the coming days, possibly heading toward 26,000, which is the next psychologically important level.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R