Article / 02 June 2015 at 11:25 GMT

European Stocks: Lower highs?

Trader / TheSteadyTrader.com
United States
  • European markets appear set to correct lower
  • Temporary dislocation in bonds could impact equities
  • Daimler stock appears set to break to the downside

Daimler-Benz
Daimler's automotive pedigree remains peerless, but its shares 
are beginning to lose some of their lustre. Photo: iStock

By Serge Berger

The beginning of the first month of summer has arrived and for European stocks this likely means more of what we have seen since the April top – namely a choppy sideways move that will do its very best to frustrate traders.

Ultimately, however, things should resolve with a more meaningful price correction lower. When, you might ask? Historically speaking a better chance for a volatility pickup is the second half of the summer.

In the bigger picture, the most important focal point in my view remains the bond market, which saw a good spike in volatility back in April as bonds dropped and many European bonds with negative yields flipped to the positive side for a brief spell. 

As I have been saying for a couple of years now, the market's focus is a moving target. Sometimes it's corporate earnings, economic data or geopolitical risks, and sometimes its entirely different... 

Given the slow tendency toward higher interest rates, thinner staffing on bond-dealing desks and a much larger amount of bond supply, the current risk for equities is in my opinion a temporary but violent dislocation in the bond market

Looking at the price chart of the 10-year German bund, we see that a classic price overshooting took place in late 2014 and early 2015, bringing yields to their knees. 

The sharp drop in bond prices over April and May has since mean-reverted the bund to the lower end of the channel and my guess is that if prices can establish a lower high versus those seen in April, we will close in on a higher volatility environment for equities as well.

Bund charts could provide a glimpse into future equities sentiment
German Bund 10 Year
Create your own charts with Saxo Trader click here to learn more.
Source: Saxo Bank

The Euro Stoxx 50 (STOXX50E.I) failed to break above the 3.700 area last week and increasingly looks to have established at least a nearer-term lower high that is pushing more weight on to the support zone near 3,500. 

Given the rangebound nature of the market in recent weeks, however, this area remains support until proven wrong.

Euro Stoxx 50

A failed breakout is now testing support. Source: Saxo Bank

On the single-name stock front, Daimler AG (DAI:xetr) has developed a series of lower highs since its top in March and today is attempting its first break below the 100-day simple moving average (blue line) since climbing above it last November. 

With better selling pressure this stock could easily fall into the mid-70s. Such a move would likely also be a good sign and would coincide with more weakness in the broader European stock market. 

Daimler AG

Daimler stock could be primed for a break lower. Source: Saxo Bank

— Edited by Michael McKenna

Serge Berger is a specialist in swing trading/trend following. Follow Serge or post your comment below to engage with Saxo Bank's social trading platform.

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