Stocks hold onto gains despite Greece confusion

As has been the case over the past couple of weeks, it is all about Greece for stocks with other macro factors being overlooked at the moment.  Just before midday today, the markets surged higher before retreating somewhat amid confusion over Greece. Apparently, an EU official said that Greece’s latest reform package could be the basis for a deal with its creditors, but this was quickly dismissed by another unnamed EU official who said that the terms had been rejected. However, as we go to press, stocks are holding onto the bulk of their earlier gains, suggesting investors are still confident that a deal will be reached soon. Once Greece is finally out of the headlines – soon, hopefully – then the investor focus may return to the actual fundamental drivers of the stock markets. On that front, we remain quite bullish on European stocks due to the potential for acceleration in euro zone growth thanks in part to the virtually zero interest rate policy at the ECB. Obviously if Greece were to default, or worse leave the Eurozone, things could turn really messy for stocks in the near term.

The Euro Stoxx 50 has already broken out of its bearish channel. It has thus ended the counter-trend move that had started in April after peaking at 3835. Purely from a technical point of view, the path of least resistance is now clearly to the upside – and the buying pressure could accelerate if Greece is saved.  The aforementioned channel could also be thought of a longer term bull flag pattern. Now that the index has broken above the resistance trend of the flag, a major continuation could be underway – especially as the ap
parent bottom has been found near the relatively-shallow 38.2% Fibonacci retracement level of the long-term upswing around the 3430/5 area. In healthy bull markets, a pullback to around the 38.2% Fibonacci level often precedes a rally that at least extends to the 127.2% Fibonacci level. The 127.2% extension for the Euro Stoxx is at 3960 which incidentally is just 10 points of the 78.6% Fibonacci level of the downswing from the 2007 peak. This 3960/70 area could be a target area for the bullish speculators, where we may see some profit-taking.

Now, let’s not get ahead of ourselves. Obviously Greece is an issue yet to be resolved. Other macro factors might prevent the index to get to the abovementioned levels. As traders and analysts, we should pay close attention to the near-term key technical levels as well. A few such levels are now fast approaching. First and foremost are the Fibonacci retracement levels from the April high at 3560 (61.8%) and then at 3735 (78.6%). The April high at 3835 could be another sturdy level to break down. Meanwhile the key support is at 3575, a level which was formerly resistance. Thereafter there is just thin air until 3500. A potential break below 3500 could pave the way for a move towards the long term support area between 3300 and 3325.