Article / 20 July 2015 at 10:30 GMT

Bulls are back for EuroStoxx 50

Owner / Seven Days Ahead
United Kingdom
  • Traders can now re-focus back to economic fundamentals, refocusing on Europe
  • FX traders are bullish as the EUR looks set to weaken further post Grexit
  • Lower oil prices and no Grexit fears are two powerful bull signals for stocks

By Mark Sturdy

Technicals

On June 26, we wrote that European Blue Chips would be poised for strength if Greece stays in the Eurozone. We also wrote that a large bull falling wedge was on the point of completion in the EuroStoxx.

That remains the case. The catalyst  for the move up was the bounce from support at 2975. But note now the possible monthly Key Reversal if the market closes at or above current levels.

EuroStoxx 50 monthly chart:
EuroStoxx 50

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Source: Seven Days Ahead

EuroStoxx50 weekly chart:

EuroStoxx 50

Source: Seven Days Ahead 


Since we wrote that on those subjects, the market has dropped sharply and then bounced higher than before. Note that that bounce off the Prior High support at 3322 and 3293 (itself a Key Reversal) adds to the solidity of the overall construction.

If not already long from the support at 3293, there should be further buying on a break up through 3761. All the more so, because that will confirm the completion of the longer-term monthly pattern.


Fundamentals

The long-running Greek drama finally came to a close this week, in so far as financial markets are concerned. Although austerity will have to be endured for several more years yet by the Greek people, they have avoided a European exit and bankruptcy.

Moreover, now that the Greek parliament has agreed the terms of the latest rescue deal, the ECB is free to increase emergency funding to the Greek banks, meaning they look set to reopen on Monday.

Now Greece can slip quietly out of the spotlight. Traders can re-focus back on economic fundamentals. For the Eurozone that means taking stock of the economy’s current state of health.

The German economy, long seen as the locomotive of Eurozone growth, continues to chug along as before. But whereas the rest were still largely in recession, there has now been some progress.

Ireland has recovered well from its own financial disaster; but of greater importance, France is at last showing signs of life and so too, is Italy.

Meanwhile the ECB continues to operate its QE program. This still has over a year to run as it tries to drive up both growth and inflation in an economy that has taken too long to recover from a list of recent crisis.

What then does this mean for stocks, especially the DJEUROSTOXX50?

We judge traders are in a bullish mood. The EUR looks set to weaken further now that “GREXIT” has been avoided, which should help exporters. Add in the still-low oil price and record low interest rates and the Eurozone economy continues to enjoy a significant stimulus.

But there is more to come. The major powers have, after years of negotiation with Iran, reached an accord which limits Iran’s nuclear activity to the extent where she will be unable to build a nuclear weapon, in exchange for the lifting of economic sanctions.

Before the imposition of sanctions, Iran was one of the world’s largest oil producers and exporters, now sanctions are set to be removed, Iran’s oil will come back to market.

The oil market is already over-supplied and this has been perpetuated by Saudi Arabia maintaining an ever-increasing output in an attempt to make US shale oil production largely uneconomic and maintain the Kingdom’s position as the dominant force in Opec and the global oil market.

But all of this comes at a price indeed lower oil prices. Although a small correction occurred over recent months, some gains have already been given back and we expect the oil price to fall much further.

Lower oil prices, together with the resolution of the Greek crisis, are two powerful bull signals for stocks and we judge this market will rally hard as a result.

So in summary, yes, the bulls are back in the DJEUROSTOXX50 market.


-- Edited by Adam Courtenay

Mark Sturdy is owner of Seven Days Ahead. Follow Mark or post your comment below to engage with Saxo Bank's social trading platform.

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