DAX testing key 9600 support as market awaits direction from fundamental events

European stocks opened on the back foot today, largely as a result of long-side profit taking as the market awaits direction from the FOMC tomorrow evening and the outcome of the Scottish independence vote on Thursday. Also on Thursday will be Alibaba’s NYSE debut – this is going to be the biggest IPO ever which may spur a rally in tech stocks and the wider market. As far as today is concerned, we have already seen the main data releases from Europe. The rate of inflation in the UK fell to a five-year low of 1.5% as was expected, which means the Bank of England has more reason to keep interest rates at record lows in order to help boost the lagging wage growth in the UK. The German ZEW Economic Sentiment was expected to show that the level of optimism had fallen to 5.2 at the start of this month from 8.6 in August. However it printed 6.9 which was thus better than expected, but nonetheless the lowest reading since December. ZEW’s assessment of current conditions meanwhile fell to 25.4 from 44.3 in August, easily disappointing economists' forecasts of 40.0. In the afternoon, a couple of macro pointers from the US – PPI and TIC long-term purchases – may cause some volatility but these won’t be game changers by any means.

Still, despite all this the DAX has managed to bounce off its lows. The German index is again finding support from the area around 9600. As you may recall from our last report that was published at the start of the month, this 9600 level was previously resistance. We noted then that a break above here would be a bullish outcome, which indeed was the case as can be seen on the updated chart, below. But the rally then stalled just ahead of resistance and the 78.6% Fibonacci retracement level at 9800. This remains one of the important levels to watch going forward, while a more immediate term resistance level comes in around 9685. In the slightly longer term outlook, price action around the 10000-10050 range is going to determine the direction. But that area is some 400 points from where we stand at the moment, but will surely look again at the DAX if and when it gets there.

Meanwhile a potential closing break below the 9600 level could pave the way for a drop towards the 200- or 50-day moving average at 9550 and 9500, respectively. On a side note, the 50-day SMA recently fell below the 200 to create a so-called ‘death crossover,’ which, as its name suggests, is a bearish development. It should be noted that some hedge funds and other trend-following speculators do not usually buy an asset whereby the two moving averages are in this particular order. The next support below 9500 comes in at 9450 – this being the 38.2% Fibonacci level of the up move from August – followed by resistance-turned-support at 9400.