Article / 09 May 2014 at 8:54 GMT

European Stocks: A marginal breakout in the Euro Stoxx 50

Trader /
United States
• Choppy, sideways trading resumes after brief ECB fillip
• 2% or 3% upside possible in Euro Stoxx 50 in coming weeks
• Italy's FTSE MIB Index is looking good for more gains

Thursday's, and likely this week's main event for European equities was the European Central Bank (ECB) rate decision, which saw benchmark interest rates left unchanged, as was expected by the majority of economists. In the press conference that followed, ECB president Mario Draghi repeated the same comments from last month about monetary policy. The twist this time around, however, came when Draghi stated that the ECB was prepared to begin an asset purchase program as early as next month when the ECB updates its economic projections. This had the effect of burning the currency — EURUSD fell, stocks rallied, and interest rates declined. Not surprisingly, this was the same reaction that we saw in US markets when the Fed first announced its asset purchase program.

While European stocks did press marginally higher on Thursday, in the broader sense the choppy sideways pattern continues, which now leaves the active trader and investor with three choices: 1. keep trades very short in duration and potentially just intraday, 2. use options strategies like calendar spreads that take advantage of sideways markets, or 3. just simply stay out of the market until a better directional move takes place (up or down). For most, ironically the third option is likely the most difficult one to implement as it requires a great deal of discipline, but like I often say, staying in cash often is also a valid investment decision.

On Tuesday I discussed the chart of the Euro Stoxx 50 Futures (FESXc1) and said that ultimately something will have to give for the index, implying that the path of least resistance remains to the upside. With Thursday's marginal breakout past the multi-month resistance line, an upside resolution has thus taken place and long positions in the index, with a multi-week timeframe now make better sense. I would however caution that today is scheduled to be a somewhat dull day on the economic news front and that it is somewhat difficult to see the index making any major sprints higher in front of a weekend. Nevertheless, barring any quick bearish reversal of yesterday's gains, another 2 percent  to 3 percent of upside for the index now looks much more likely over the coming weeks.

Euro Stoxx 50
Source: Saxo Bank

Elsewhere in Europe the charts look friendly again too, particularly in the Italian FTSE MIB Index (SPMIB.I) which tacked on a solid 2.30 percent yesterday, which resulted in the index holding its 50-day simple moving average (yellow line) once more. Of course we have been here before and the last bounce off the 50-day failed to take the index to a new high, but note how this time around the moving average is much closer to the diagonal resistance line (blue), which thus means the index has a better chance of breaking to new highs.

Source: Saxo Bank

Thursday's best performer in the Euro Stoxx 50 Index was Italy's biggest utility Enel SpA, as the stock gained 5.19 percent on the day. The stock rallied right out of the gates as it gapped higher and closed at the absolute highs of the day. From a technical perspective the move was significant as it broke the stock out of a multi-month sideways move, which held its 50-day moving average (yellow). From here the stock stands a good chance of continuing higher towards the EUR 4.40 to EUR 4.50 area on this renewed upside momentum.

Enel SpA
Source: Saxo Bank

— Edited by Clare MacCarthy
Raymondscott Raymondscott
This comment has been redacted


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