DAX leads European stocks higher

So much has been said of the narrowing stock market breadth and lofty valuations in the US, but the major indices there are still looking stable and may even eke out small gains for the year. In the Eurozone, the indices, such as Germany’s DAX, have been more resilient this year, undoubtedly because of the ECB’s efforts to help stimulate the still-limping Eurozone economy. The widening of the short-term yield spreads between the Eurozone and US bonds, and the resulting weaker EUR/USD exchange rate, has boosted the appeal of European exporters.

However even the DAX has been unable to rise this month following the early December sell-off. But as I mentioned before going on holiday, December has been a month of two halves: the first for the bears and the second part for the bulls. Like most other global indices, the DAX has so far made back more than 50 per cent of the losses suffered earlier in the month. At the time of this writing, it finds itself trading at 10800, a good 145 points or 1.4% higher on the day and outperforming its European peers. Part of the reason for this rebound can be explained away by seasonal factors as the second half of December tends to be a positive one for equities, due among other things to the effect of the so-called “window dressing” by money managers and month-, quarter- and year-end rebalancing. The lack of any major sentiment-sapping economic news has also reduced investor nervousness, resulting in withdrawal of bearish bets. Will we now see a strong finish at the twilight of 2015?

Since many market participants are still on holiday, trading volumes can be thin during this time of the year. This could lead to some increased volatility, which is not necessarily a bad thing as it could offer both the bulls and bears some decent trading opportunities. But essentially investors appear sanguine about the recent interest rate increase in the US, which was already priced in and came at least 6 months later than had been expected initially. Investors know full well that that the other major central banks are still pretty much dovish, with interest rates at historically low or negative levels and QE at full-throttle. This still keeps me fundamentally bullish on stocks, and I envisage there may be one final parabolic-like upsurge in the rally before a top is formed, which could possibly take months if not years.

From a technical perspective, the DAX may have resumed its long-term bullish trend once again. It had already formed a double bottom reversal pattern at the end of September around the 9300/25 area, with the resulting rally eventually coming to a (temporary?) halt at 11430 at the end of November. Interestingly, it appears as if the buyers have again “bought the dip” around the 61.8% Fibonacci retracement level at 10115/20 against the double bottom low. What’s more, the index has again climbed above the pivotal 10520 area again, which had been strong resistance and support in the past. Thus, a major bullish development may already be in progress. At the very least, the bulls may now aim for the 61.8% retracement of the most recent downswing (from point B to C) at 10930. Further resistance levels include the 200-day moving average, currently at 11010, followed by the longer-term 61.8% Fibonacci level at 11220 and then the November high at 11430. But potentially, the index could go on to achieve its double bottom measured move target at around 11720 over time, where it will also meet a couple of Fibonacci levels too. We could get here at some point in January.

But if the index fails to break through some of the key resistance levels mentioned above and drop back below the 10520 pivotal support on a daily closing basis, then a revisit of the long-term bullish trend around the psychologically-important 10000 mark would be possible. However as things stand, the DAX is looking strong once again and traders may want to act on any bearish developments with extra caution and after some sort of confirmation.