DAX: stocks vulnerable as Greece flirts with default

Risk was totally off the menu first thing this morning. The European stock markets plunged as the situation in Greece deteriorated at the weekend after the government rejected the latest bailout offer from its international creditors, called for a referendum and subsequently imposed capital controls. But the major European indices have since bounced off their lows as traders who had sold into last week’s rally, took some profit on their positions near key technical levels. Nevertheless, the investor sentiment is clearly downbeat, not just because of increased probability that Greece might be heading out of the euro zone soon but also because of the Chinese stock market turmoil where not even a PBoC rate cut was enough to underpin equities overnight. Thus, stocks remain in danger of further falls this week – especially if Greece fails to repay the $1.6 billion it owes the IMF on Tuesday. But thereafter the pace of the potential selling pressure could ease as speculators exercise some caution ahead of the US jobs report on Thursday and the Greece referendum on Sunday.

Technical outlook: DAX ‘filling’ the gap

On Friday, we put out a report on the Germany DAX index and in it we suggested that a big move was on the way at the start the start of this week depending on the outcome of the Greek talks at the weekend. As it has turned out, the situation has obviously deteriorated which is why the markets have gapped sharply lower this morning. We mentioned in our Friday’s report that a potential breakdown of the key supports at 11360 and 11200 could see the index drop all the way back to 10855, a level which corresponds with the long-term 38.2% Fibonacci retracement level. This is almost exactly what has happened today, as one can see on the updated chart, below. So far however, the index has managed to bounce strongly from this key support level, thanks in part to profit-taking by those who had sold into last week’s rally.

But how much higher can the DAX go from here? At the time of this writing, the index is testing a potential turning point around 11150 to 11200. The lower end of this range corresponds with the 38.2% Fibonacci retracement of the move down from last week’s high, while the upper end is the aforementioned broken support level. If the index breaks above this range then it may go on to completely ‘fill’ the weekend gap, before potentially turning lower once more upon arriving around the old support level of 11360 (where we also have the 61.8% Fibonacci level converging). Overall, the technical bias remains bearish while the index holds inside the downward-sloping channel.

Meanwhile if today’s low and the above-mentioned support at 10855 gets broken, the DAX may then make a move for the mid-June low at just below 10800, the 200-day average at 10615 and then the 127.2% Fibonacci extension level of the BC swing at 10570. The support trend of the bearish channel comes in around 10500-10600, depending on the speed of the potential drop to this area. These are among the potential support levels that we will be watching closely this week.