FTSE MIB, European stocks lose momentum

Along with the other leading European stock indices, the Italian FTSE MIB has come under some selling pressure in recent times. Yesterday, the stock markets bounced back after the Chinese central bank eased the reserve requirement ratio for banks to encourage lending after GDP growth slowed to 7% in the first quarter. Although there was some follow-through in the buying momentum this morning, the markets have since lost some of that momentum. In part, this was because the German investor confidence unexpectedly fell the first time since October 2014. The closely-watched German ZEW Economic Sentiment came in at 53.3 for April versus 55.6 expected and 54.8 last. It looks like the soft economic data releases from the US and China recently has dampened the outlook for the global economy somewhat. Investors may therefore be wary of reduced exports from Germany and elsewhere in the euro zone, despite the still-falling euro. Meanwhile, the on-going Greek jitters continue to chip away at sentiment. Making things worse were reports that the ECB was looking into limiting its funding to the Greek lenders; the news weighed heavily on the country’s banks this morning. All the focus is now on the Eurogroup meeting on Friday in which the Greek government will need to come up with a plan over economic reforms needed to unlock bailout funds and repay the €200 million it owes to the IMF on May 1 and another €760 million later in the month. Until and unless they come to some sort of agreement in these talks it is unlikely that speculators will take on too much risk in the meantime. So there is potential for a larger pullback in European stock markets this week. Ultimately however the ECB’s on-going bond purchases will probably push benchmark Eurozone government bond yields further lower, forcing yield-seeking investors to look elsewhere for better returns – such as the stock markets.

Indeed, from a technical point of view the long-term outlook for the FTSE MIB still looks constructive despite retreating about 4.5% from its recent highs to around the 23000 support level at the time of this writing. The rally faded last week around the 23935-24050 area. Among other technical factors, this is where the 127.2% Fibonacci extension level of the last major downswing from June 2014 high comes into play, making it an ideal profit target area for the buyers. Therefore the pullback may well have been driven mainly by the withdrawal of bids rather than the sellers showing their presence en masse. Indeed, as can be seen from the chart, the key support is still further lower around 22400-22630, which is a resistance-turned-support area. In addition, the 50-day moving average, currently at 22580, also comes inside this range. Therefore while the index holds its own above 22400-22630, the medium-term bullish trend would remain intact. But if the buyers fail to defend this area then we may see a larger correction in the days to come. Meanwhile the next resistance levels to watch are as follows:

• 23500 – an intraday support-turned-resistance level

• 23935 – the 127.2% extension level of the downswing from June 2014 high

• 24050 – area around the most recent high

• 24535 – October 2009 high

For a detailed explanation of Fibonacci analysis, please read our Ultimate Fibonacci Guide HERE.