DAX not out of the woods just yet

After surging higher on Tuesday, European stocks are posting moderate gains across the board today. Speculators are making a more sober assessment of the situation regarding Greece, realising that it is still pretty much the same, while others are trying to take advantage of the bullish momentum, arguing that there is further juice left in this rally. Hence, or otherwise, the DAX is ‘only’ up about 80 points compared to some 300-plus points yesterday. With regards to Greece, it was reported yesterday that the German Chancellor Angela Merkel may be satisfied with the debt-laden nation committing to just one economic reform sought by creditors to open the door to bailout funds.  However, such a deal has been dismissed by a government spokesman. Nevertheless, traders are displaying optimism that a deal to release €7.2 billion in bailout aid will eventually be reached before Greece runs out of cash or make the €1.6 billion euros payment to the IMF at the end of the month.

In addition to hopes over Greece, the recent easing of the dollar rally is chipping away at the risk-off sentiment on Wall Street as it boosts the appeal of US exporters. The dollar has pulled back on signs that the recovery is fading in the world’s largest economy, which in turn has raised hopes that the Fed may delay raising rates until next year. Though a September 2015 hike looks the most likely outcome, the calls for an early 2016 lift off are growing. The latest organization to urge the Fed to do so has been the World Bank after a similar call from the International Monetary Fund last week.  Today’s US macroeconomic data – including the May retail sales and the weekly unemployment claims figures – could bolster those calls should we see some weaker numbers.

Though the DAX may have rallied strongly yesterday and is up again today, it is by no means out of the woods just yet. As the daily chart shows, below, the index has broken back above the pivotal 11200 level after finding good support at the bottom of the bearish channel. But the index is still inside this channel and so the rally could falter once it approaches the upper trend or some other resistance levels, such as those shown on the chart. Until such a time that it breaks above the channel, we remain cautious, but slightly optimistic, about this rally – particularly as the Greek issue is still unresolved and the euro is stronger compared to a few months ago.  The upper trend of the bearish channel comes in around the 78.6% Fibonacci level of the last downward move from 11925 (point C) at 11700, where we also have the 50-day moving average converging. But those who trade the DAX will know that for whatever reason, the 61.8% Fibonacci retracement tends to be the more significant technical level. This one comes in at 11520, where we also have the 100-day moving average converging.  If and when the abovementioned resistance levels are cleared the DAX bulls may then target the May high at 11925 and then the 127.2% Fibonacci extension level at 12215. But eventually it may even go on to reach fresh record levels given the fact that the ECB’s bond buying programme has only just started a few months ago and the stimulus programme has more than a year left to run.

Meanwhile if the rally falters around the resistance levels mentioned – or elsewhere, for that matter – then traders will need to watch 11200 closely for this level has been pivotal in recent months. A potential break below it could result in fresh selling pressure and the index could then drop back towards the lower end of the channel once again.