Article / 30 July 2013 at 8:53 GMT

European Stocks: The calm before the storm

Trader /
United States

As I pointed out in my US stocks piece yesterday, we have arrived at a crucial week for markets.  With major economic reports out of the US this week (the Fed on Wednesday, July non-farm payrolls on Friday) and a plethora of corporate earnings reports, just as we move into the thick of the summer vacation season (i.e. thinned ranks at trading desks) things could get tricky in a hurry.

While I hesitate to draw much parallels between the Japanese Nikkei 225 Index (NIYc1) and the major European equity indices, I show the below chart just to point out a potential scenario for European stocks, irrespective of the correlation, or lack thereof.  Note that the Nikkei 225 Index (NIYc1), unlike its European counterparts, has already developed a lower high versus its May high, and with yesterday's continued sell-off, it has now also broken the June up-trend line and is thus out of what could be marked as a bear flag formation.  

Nikkei 225 Index

Source: Saxo Bank

For the German Dax 30 (DAX.I), and this goes for many other European large cap indices, the immediate-term action still is one of consolidation and thus an overshooting and re-test of the May highs cannot be ruled out. From a trader's point of view, aside from some sophisticated straddle or strangle options strategies, the higher probability action at this point is to wait for some economic news to pass around the mid-point this week, before making any significant portfolio moves. 

German Dax 30

 Source: Saxo Bank

Given what's on tap later this week, discussing the broader European indices seems somewhat redundant today, at least until some of the economic and corporate data is out, so I'll take the opportunity to point out a couple of individual stocks that I am watching.

German pharmaceutical giant, Bayer AG (BAYN: xetr) found good support near the EUR 77.00 area twice so far this year, and now the stock is consolidating in what looks to be a coiling-up process for more potential upside. Given where we are in the broader markets, I am waiting for a clear breakout signal before potentially jumping on the long side of the stock for a trade.  The company is scheduled to report earnings tomorrow, Wednesday July 31.

Bayer AG

 Source: Saxo Bank

German car manufacturer Volkswagen AG (VOWG: xetr) in June developed a higher low versus its April lows and with its latest rally has moved right back up to an important resistance point. Some consolidation around the EUR 160 to EUR 168 area could ultimately be healthy for the stock to move higher still.  This company too is scheduled to report earnings tomorrow, Wednesday July 31.

Volkswagen AG  

Source: Saxo Bank

Serge Berger Serge Berger
Might I add that on Thursday we also expect an ECB rate decision. A serious parade of eco data this week


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