DAX: weaker eurozone data pushes German index towards key support levels

European stocks fell sharply in response to some weaker eurozone data this morning, which saw Germany’s DAX index drop more than 1%.  Both the latest services and manufacturing sector purchasing managers indices (PMIs) were weaker than expected with France once again being the weak link. The weaker PMI numbers provided the bullish speculators more excuse to book profit at these lofty levels, with sentiment already dented somewhat by the on-going situation in Iraq.

The eurozone manufacturing PMI for June fell to 51.9, which is the lowest level since November, down from 52.2 in May, while the services PMI dropped to 52.8 from 53.2. As a result, the composite index printed 52.8, which was thus lower than last month’s 53.5 and also below the expected reading of 53.4. At the country level, the German manufacturing PMI was 52.4 versus 52.7 expected, while its services sector PMI was also weaker at 54.8. In France, the PMIs for manufacturing and services sectors were 47.8 and 48.2, down from the previous month’s 49.6 and 49.1 respectively.

Technical view

The DAX has achieved the psychological target of 10,000, as we had highlighted the possibility in our previous report. But after climbing higher by an additional 50 points from there, it has struggled for further momentum. This has been due to profit-taking, in our view. As a result, the index has broken a short-term bullish trend line, which also suggests that the buying momentum has faded somewhat. Indeed, the Relative Strength Index (RSI) has meanwhile continued to fall after creating a triple bearish divergence i.e. the marginal higher highs on the index were not backed by corresponding moves in the RSI, which actually made lower highs.

Nevertheless, the longer-term trend is still bullish and so we wouldn’t be surprised if the DAX finds its feet once again and rally to fresh record highs at some point in the near future. At the time of this writing, the index was testing support at 9880. Although there’s a good chance it may bounce back from here, a more profound support area is 60 to 80 points lower at 9800/20. As can be seen on the 8 hour chart, below, this area was previously a key resistance zone and so could turn into support if and when we get there. A potential closing break below this area would be a bearish development, however.

On the upside, some of the (potential) resistance levels to watch are as follows:

• 10,000 –  resistance & psychological level

• 10,035/50 – the previous record high

• 10,060 – the 127.2% Fibonacci extension of the corrective move from January to March

• 10,130/5 – the 161.8% Fibonacci extension level of the corrective move in April

Figure 1: