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DAX: Could underperforming EU stocks finally find some love?

*** Please note: this will be my last report until I come back from holiday on August 8 2016***

The US earnings season has got off to a very good start with all the major investment banks reporting better than expected numbers – Morgan Stanley becoming the latest Wall Street giant to do so today. The focus will turn to the other key sectors now, including technology companies whose numbers will come out thick and fast over the next couple of weeks. Already we have seen numbers from Netflix and Microsoft. Although earnings and guidance from the former disappointed expectations, the latter posted a surprise increase in its adjusted earnings overnight. As a result of the mostly better than forecast earnings, the S&P 500 and Dow Jones have been able to hit repeated all-time highs in recent days. The Dow looks set to open at a new high today and if it can end the day higher, it will have extended its run of back-to-back wins to nine, its longest streak since March 2013.

While the Dow and S&P 500 have been hitting fresh all-time highs in the US, the major European indices have been far less buoyant due to the economic stagnation, troubles with Italian banks, Brexit, a rapid rise in terrorist threats and so on. But the markets here could start to rise more rapidly should earnings from European companies also start to come out stronger. In fact, Volkswagen has surprisingly published its numbers early today and said earnings in the first half of the year were “significantly higher” than expected. Its shares have rallied more than 5 per cent to the top of the DAX index, which has also helped to lift the likes of BMW and Daimler.

As well as earnings, European equities could find support from central bank stimulus, which is on-going in the case of the European Central Bank and Bank of Japan in the form of significant bond-buying programmes and low or negative interest rates. Although the ECB is unlikely to alter its policy at its meeting on Thursday, any further dovish comments could send the euro tumbling and stocks surging. Next week the focus will turn to the Federal Reserve and Bank of Japan, with the latter widely expected to do something. The Bank of England’s meeting in August will be very important to watch too with several policymakers here hinting at further policy easing measures in the aftermath of Brexit vote. However economic data from the UK this week has been fairly strong with both the inflation and employment figures beating expectations and earnings rising in line with the forecasts. Admittedly these macro pointers are a bit out-dated and so the BoE may look past them and cut rates or expand QE anyway.

Technical outlook: DAX

The DAX looks to be on the verge of finally moving out of its consolidation phase in the coming days or weeks. As the weekly chart shows, below, the index is now not too far off its bearish trend line and the 55-week moving average around 10200. A break above here could see the index go for a test of the next area of resistance in the 10340-10475 range.  

But potentially, the DAX could go much higher. After all, the volatility has been contracting inside narrowing ranges in recent times, so if a breakout were to happen the next move could potentially be explosive, as new traders step in to take advantage of the move. Added to this, price action has been bullish inside the consolidation phase. As can be seen, there is a potential inverse head and shoulders pattern is in the making. The index has also found support from its still-rising 200-week moving average, thereby forming a higher low. It now needs a higher high above the 10340-10475 range.  If seen, it will violate the trend of lower lows and lower highs.

So, conservative traders may wish to wait for that breakout to occur before potentially jumping on board. Alternatively, trading on the short-term time frames with a bullish bias could be another strategy they may wish to consider. The near-term bullish bias would end in the event the DAX breaks decisively below the next key support at 9800. Even so, the medium-term bullish trend would still remain intact unless the right shoulder area breaks down. 

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

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