Article / 22 April 2014 at 8:36 GMT

European Stocks: Positive bounce for the bulls

Trader /
United States

• Plethora of single-name stocks will be turning higher
• German Dax 30 has to overcome multi-month resistance
• Volkswagen earnings report due next week

It seems like an eternity ago since I last put pen to paper on my thoughts on the state of European stocks - a long weekend tends to have that effect. Even though there have only been three trading days in European stocks over the course of the past week because of the Easter break, last Tuesday's price action had the makings of a potentially important near to medium-term bottom.

After having mostly focused on single-name stocks for the better part of the past few months in European markets, given last Tuesday's potential capitulation bottom, my focus at least for the coming days will be on the indices for direction. For, if the indices can continue to bounce and eventually break out of their multi-month trading ranges, then a plethora of single name stocks will also be turning higher, and this is likely to take place in a group and sector rotation manner. In other words, a great number of trading setups should present themselves as we can play single-name stocks breaking higher, one group at a time, on the back of a an eventual upside resolution in the Euro Stoxx 50 (FESXc1) and the German Dax 30 (DAX.I).

For context, let's look a little closer at last week's action in the Euro Stoxx 50 (FESXc1):

First, note that the bottom of the range continues to be bought aggressively - see the quick and bullish turnarounds twice in March and then again last week. In that vein, last Tuesday April 15 I said that "I would be happy to buy the lower end of the range, closer to the 3,000 area for a bounce, as much as I would be glad to buy a break past resistance around 3.160". Sure enough, that day the index took a sharp turn lower intraday, coming close to the 3,000 mark, before rebounding quickly and leaving behind on the daily chart a bullish so-called hammer candle. The hammer candle is defined by its long tail (the intraday sell-off), and a small-ish head.

In essence, last Tuesday's price action showed that the bears did not have what it takes to push prices lower as they quickly capitulated and let the bulls take over. Over the following two days the stocks pushed higher and thus displayed good follow-through buying. So far, this has allowed quicker traders a great risk/reward long-side try against last Tuesday's lows but the Eurostoxx 50 as well as the German Dax 30 still has to overcome multi-month resistance before we can play more aggressively from the long side. In the meantime, bulls can hang a hat on last week's strong bounce off the lows but shouldn't get complacent just yet.

Euro Stoxx 50
Source: Saxo Bank

One stock that could benefit in the early stages of an eventual break past resistance in the German Dax is German car manufacturer Volkswagen AG (VOWG:xetr). The stock is already toying with a break past multi-month resistance and a push higher by the broader market could get the stock to finally clear resistance. Please note that Volkswagen is scheduled to report earnings on April 29.

Volkswagen AG

Source: Saxo Bank

Sergei Sergei
Good day!

Why not to think about BMW GY? The picture looks even better. Also BMW cars are better then VW.

Have a nice day, Laptev Sergey.
Serge Berger Serge Berger
Hi, BMW looks good too, nothing wrong with that.
Sergei Sergei
Also I would like to draw your attention to Auto Parts &Equipment Industry. The interesting fact is that this industry looks even more positive the car producers.
Serge Berger Serge Berger
I very much agree, nice and defined risk too in that space


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