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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 28 January 2014 at 10:08 GMT

European stocks: First support reached, downside ahead

Trader / TheSteadyTrader.com
United States

• Earnings season sheds light on state of US firms
• GDP data could confirm UK as fastest-growing economy in Western Europe
• German healthcare giant Bayer AG finds first support

Allow me to start today's missive with a quote from my article last Friday about the state of the broader, Western European markets: "The German Dax 30 [DAX.I] and the Euro Stoxx 50 [FESXc1] both remain, at least near term, overbought and not in any juicy spot for any risk-taking. With Thursday's global sell-off, both indices also came in to a degree but not enough yet to interest me in a buy-point as yet." After Friday's sell-off, European stocks have reached better, immediate-term support levels through a purely technical lens, but given the velocity of the selling and considering that most of the indices are still showing very steep slopes, more downside is likely ahead.

Two weeks ago, I mused that the news/data focus in the near term for single-name stocks is back to the US as the earnings season sheds much light not only on the state of US domestic firms, but also on global behemoths that conduct much business in Europe. This week, many large US conglomerates and technology giants are scheduled to report earnings. Depending on the magnitude of any good/bad news out of the earnings reports, the ensuing price action in the stocks will also trickle over to European stocks.


Osborne

Today's GDP data offers some encouraging news for UK chancellor George Osborne. Photo: Peter Macdiarmid / Getty


The other set of news that I am closely focusing on again this week is UK economic data, which today gets on the big stage with the release of the Q4 GDP figures. Last Friday, I laid out the reasons for my marginally more bullish view on UK stocks and today's GDP data could confirm the UK as the fastest-growing economy in Western Europe.

In terms of the charts, as mentioned above, the German Dax 30 (DAX.I), with Friday's selling, has reached better, near-term support at a level I shall call support level 1, as per the chart below. Support level 1 is a confluence zone made up of the rising 50-day simple moving average (yellow line) as well as the September 2013 uptrend. I expect a bounce attempt from support level 1 but, eventually, better near-term support is around support level 2, closer to the 9,000 area. This support area is made up of the 100-day simple moving average, as well as roughly a 50 percent retracement of the entire rally since September.

German Dax 30
Source: Saxo Bank

For the Euro Stoxx 50 (FESXc1), first support has also been reached and it is made up of the 100-day moving average, which has held support since late August 2013. However, the steepness of the drop down to the 100-day moving average, as well as overbought readings, comes in closer to the 2,860 area, which is lateral support and is also where the rising 200-day simple moving average (red line) comes in.  

Eurostoxx 50 Daily Chart
Source: Saxo Bank

On the single stock front, Bayer AG (BAYN:xetr), the German healthcare and agricultural products manufacturer, is showing some weakness worth looking at from the short side. After a failed breakout attempt last week, the stock dropped quickly and has now found first support. Just like the broader indices above, however, the stock has extended both in terms of the steepness of its slope and the duration of a rally, without any meaningful pause. A better support area is the 100-day moving average (blue line). I see an opportunity here, either in shorting the stock outright or playing it via options, i.e. short out of the money Call spreads or long Puts.

Bayer AG
Source: Saxo Bank

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