Tuesday, February 9, 2010

European Equity Market Update

Euro Stoxx-50 Is Below Its 200-Day Moving Average

Last week’s bounce was shorter than anticipated and another sharp decline materialized into the weekly close. From a price point of view the technical background has further deteriorated with the Euro-Stoxx breaking below the 200-day moving average. The same signal we are getting from key sectors where banks, financial service and insurance have broken their 200-day moving averages, whereas personal has a hit a new relative all time high and continues to outperform aggressively. On the other hand, last week’s decline was accompanied by a huge spike in the future volume, which
suggests that the move already had the character of a capitulation. With momentum indicators moving into deeply oversold territory, a tactical stabilization and another attempt to bounce is a likely scenario for this week’s trading. However, since we are still far wave from forming any price bottoms we think it is too early to call a bottom. We expect more down-tests over the next 2 weeks.

Euro Stoxx-50:

The price signals we received from the break below the 200 DMA and the November 3 trading low, have obviously a bearish message. However, last week’s decline was extreme in terms of price and volume. Cash and future volume jumped to the highest level since October 2008, which suggests that the down-move had the character of a classic capitulation. Furthermore, the short-term downtrend is too steep to be sustainable so alone form a momentum standpoint we expect a stabilization to be setting in soon.

Former support at 2693 is now resistance and a break is required to open tactical upside towards 2737. Supports are at 2600 and 2555, where the latter represents the 38% retracement of the March/January 09 bull move. Whether we look at the cash or at the Euro-Stoxx future volume, in both cases we saw a huge spike to the highest level since October 2008. Volume spikes often mark temporarily turning points.

The conclusion is that the Q1 correction has entered a final stage and the downside into our favored late February low should be limited from here.


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