DAX uptrend intact ahead of ECB Meeting

European stocks are trading modestly higher while US index futures also point to a higher open on Wall Street today. Investors have put the disappointment from Chinese data behind them and are hoping to hear some soothing words from Draghi at the ECB’s press conference in the afternoon. Although the ECB chief is likely to acknowledge the recent improvement in euro zone data, he is unlikely to deliver any hawkish remarks that would give rise to speculation about tapering or ending QE earlier than planned. In the absence of any hawkish remarks stocks may find an additional boost. The focus will also be on the US financial sector with major banks reporting their earnings results this week. Yesterday saw JP Morgan deliver some better-than-expected numbers. Bank of America’s numbers were mixed as adjusted EPS came in at $0.36 vs. $0.29 eyed while revenue of $21.4bn missed the estimates of $21.6bn. Goldman and Citigroup will report tomorrow and if they produce market-beating numbers as well then we may see some gains across the wider markets. Meanwhile the markets’ response to soft Chinese data overnight has been positive so far, probably due to hopes that more stimulatory measures may be introduced from the Chinese authorities soon in the face of slowing growth. Though the slowdown of GDP to 7% from 7.3% in Q1 was in line with the expectations other macro pointers from the world’s second largest economy disappointed. Industrial production grew by 5.6% year-over-year in March versus 6.9% expected; retail sales grew by 10.2% against expectations of 10.9%, and fixed asset investment was also weaker at 13.5% year-to-date vs. the same period a year ago. In other words, the start of Q2 does not look great and GDP may thus undershoot the government target of around 7 per cent.

The German DAX index has been the major beneficiaries of the ECB’s QE stimulus programme for not only has the safe haven German bond yields have hit repeated record lows, driving investors into the higher-yielding German stock markets, but the euro has also plunged which has boosted the appeal of German exports more than anywhere else in the Eurozone. But the index has now rallied some 4000 points, or 48 per cent, from its low in October which makes it difficult for some market participants to jump in at this stage of the rally. Indeed the accelerating bullish trends that can be seen on the daily chart suggest a nasty correction may be on the way soon. Some of the bullish momentum indicators are also showing flagging signs. The RSI for one has made a lower high relative to the most recent higher high in the underlying DAX index. This is potentially a bearish scenario although so far the key supports have remained intact.

Yesterday the index managed to hold its own above the prior record high of 12220 following the retreat from the 12385 Fibonacci exhaustion level (127.2% extension of the CD swing) at the start of this week. For as long as this level is defended on a daily closing basis, the short-term trend would thus remain intact. However a break below this and the first of the two bullish trends could lead to a drop towards the next support at 11870 before deciding on its next move. Meanwhile the next bullish targets could be the Fibonacci extension levels from the past price swings: 12590 which ties in with the 161.8% extension of the CD swing and 12800 – the 261.8% extension of the more significant AB swing.