DAX higher as German GDP left unrevised, but index looking overbought

The European stock markets have opened higher today with the German DAX index once again being one of the top performers with a gain of 1%. Investors are relieved that Germany’s third quarter GDP was left unrevised, but more importantly that the admittedly-meagre 0.1% growth was fuelled by consumer spending. This component of the GDP climbed by an impressive 0.7 per cent, boosted in part by record low interest rates. The weaker euro has also helped to boost Germany’s exports: overseas shipments were up a good 1.9 per cent in the quarter. The stronger domestic demand meant that the level of imports were healthy too, up 1.7%. Investors are now turning their attention to the US for further direction. The preliminary release of the third quarter GDP comes in at 13:30 GMT, while the CB consumer confidence survey will be published at 15:00 GMT. Growth in the world’s largest economy is expected to have moderated to an annualised rate of 3.3%, down slightly from 3.5% in the previous quarter. Consumer sentiment is expected to print 95.9 for November compared to 94.5 previously. A positive surprise on these macro fronts should be good news for equities. But in truth, the potential impact of these data releases is only likely to be short-lived for stocks. It is the extraordinary-loose central bank policies across the major economies which are continuing to support the markets over the longer term. For as long as this remains the case, it is difficult not to be bullish on stocks.

In the very short term, there’s increased risk for a pullback. At the time of this wring, the DAX is hovering around the technically-important 9890/9900, an area which corresponds with the September high and also the upper resistance of a bullish channel (see the 4HR chart). Meanwhile the daily RSI has drifted into the overbought territory of above 70. Thus, a small pullback here should not come as a surprise, especially after the recent acceleration of the rally. That said, the v-shaped recovery points to further follow-through in momentum. Therefore, conservative traders may wish to wait for the index to either post a decisive close above 9890/9900, which would be another bullish outcome, or a bearish-looking candle here before deciding on direction.

In case we do see a pullback here, the first level of support that one needs to watch is around 9785. Beyond this would be the corresponding Fibonacci retracement levels of the rally from the last notable low at 9125/6. The Fibonacci levels could offer some support en route to the lower trend of the bullish channel, currently around 9400. The 200-day moving average meanwhile comes in at 9510/5. But as mentioned, a potential break above the 9890/9900 area today (especially on a closing basis) would be a very bullish development in my view. In this scenario, the index may not only climb towards the psychological 10K mark once again, but this time post a decisive break above it, too. The last time it tried to break above that area was in the summer when it only managed to push by a further 50 points before dropping sharply. Therefore, the key resistance area above 9890/9900 is 10000/50.