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Article / 13 December 2013 at 13:18 GMT

European Stocks: Still hopeful for a second half December rally

Serge Berger Serge Berger
Trader / TheSteadyTrader.com
United States

When it comes to trading, as a portfolio manager and advisor I must refrain from using hope as an investment strategy, because, well, it's not exactly viable. So when I use the word 'hope' in the above title, I am not making reference to my own wishes for a year-end rally but rather to what I am hearing from much of my investment professional network, primarily made up of smart money hedge funds, family offices and proprietary trading desks.

Factoring in hope

To be clear, most of those investors don't really use 'hope' in their strategies either, but as they have made their year in terms of performance and are not pressing bets into year-end, they are trading in smaller size and from the long side still for the next two weeks. Why? Well, the probabilities of at least some sort of a Santa Claus rally are very high, i.e. the odds are in favour of leaning long the second half of December. And since professional money management is all about risk management and seeking out the high probability trade, having some sort of hope of an equity rally into year-end, if only in the spirit of the holiday season does make sense from where I sit.     

Just like the second half of December tends to see a little lift in stocks, the first half can often be choppy with downward pressure being applied by investors booking gains before their two-week year-end respite...and just so they can watch the year-end rally that they missed from their ski chalets...so it goes.

lapland
Nothing quite springs hope eternal like Christmas, for a year-end market rally. Photo: Shutterstock.com


Fed taper possibility

As it relates to December, thus far stocks are finding it difficult to find much of a bid as recent fears of tapering the quantitative easing program by the US Federal Reserve are making the rounds again. With that in mind, next Wednesday's Federal Open Market Committee meeting looms large and likely will serve as the toggle for equity performance for the remainder of the year.

Because neo-mercantilism (A policy regime that encourages exports, discourages imports, controls capital movement, and centralises currency decisions in the hands of a central government: Wikipedia) is the environment in which we find ourselves, make no mistake about the fact that any taper/no taper decision out of the Fed next week certainly has the capability to shoot down Santa's sleigh, if it wishes to do so.

With this week's continued slide in stocks, European bourses have reached lower still and for many of them reached their next support levels.The Euro stoxx 50 (FESXc1) in the meantime has reached its rising 100-day moving average (blue line), and just about the middle of the broader support zone (yellow box), which I also laid out on Monday. The 2,900 area (give or take 10 points) offers support, which, if broken will lead to 2,880, and if the Fed decides to taper next week, the 200-day moving average (red line) likely come into play. On the upside, if the 100-day moving average holds, then a re-test of the 3,100 area in coming weeks is possible.

Eurostoxx 50

Source: Saxo Bank

Whither DAX?

The German Dax (DAX.I), on Thursday reached the lower end of its Bollinger bands for the first time since early October, which also coincides with the 9,000 mark. If this holds, then a re-test of the year-to-date highs works as the upside target from a swing trading perspective, whereas a failure below 9,000 would likely lead to another 100 points lower. Either way, watching how the Dax reacts to the 9,000 area will be telling for coming weeks. 

German Dax 30

Source: Saxo Bank

In the UK, the FTSE 100 (FTSE100.I) is displaying an interesting series of patterns, where over the past 12 months the index has a remarkable love/hate relationship with its 200-day simple moving average (red line). In essence, the index has developed a habit of dipping below its 200-day moving average to suck in the shorts, only to quickly rip higher, leaving any bears holding the bag. We are seeing a potential set-up for this once again here as the FTSE is trading below the 200-day moving average. Personally, I like to see price confirmation back above the moving average before going long the index here.

FTSE 100

Source: Saxo Bank

On the single stock front and sticking with the UK, Vodafone Group PLC (VOD:xlon) has been trading in a sideways pattern above its 50-day moving average for the better part of the past two weeks. The pattern looks constructive and a trade could set up upon a break out of the range to the upside

Vodafone Group PLC

Source: Saxo Bank

(mo)

13 December
Mickette Mickette
Hey Serge, they definitely would need this before Christmas!
13 December
Serge Berger Serge Berger
That is awesome! Where can I get one of those? Would really spice up the Christmas parties
13 December
Mickette Mickette
Come over to the German/Austrian border!
13 December
Mickette Mickette
WOOAH
13 December
mgdogan mgdogan
Nice call mickette

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