Friday was a typical risk-off day. It wasn’t particularly a bright week as uncertainty is looming over the markets with no clear understanding of what’s next.
After such a difficult year and with lockdown measures still in place, despite the introduction of the vaccine, traders prefer to take profits just a few days before the end of the year.
From sector trends it seems that the market is discounting a more pronounced macro slowdown than expected and is returning to growth stocks.
Let’s take a closer look at the reasons for this decline.
The agreement in the EU commission that released a EUR 1.8 trillion Recovery Fund does not seem to have had a positive impact on European equity markets. At the ECB press conference, Christine Lagarde spoke of economic growth being lower than expected in September. The markets obviously did not take it well.
After the negative data on unemployment claims, the US stock market, which had risen on bets of new fiscal stimulus, no longer seems to believe in it. With indices at record highs, many decided to sell off ahead of the weekend.
The third reason that weighed negatively on European stock exchanges was the lack of an agreement between the EU and Great Britain. The 31st of December is approaching and if no agreement is found between the two parties on some important points, it will be hard Brexit. And this outcome is not very welcome to the markets.
The Fed will be in the spotlight along with the Bank of England and the Bank of Japan. On Wednesday evening the Fed could offer news on its buying programme and this could have a good influence on the markets.
On Monday we will have the Supreme Court ruling on the US election whilst the German IFO index will take place on Friday.
We will also mention the quarterly rollovers on Friday the 18th.
Friday’s close of the US indices has not yet given a clear bearish signal as traders, in the presence of negative news, use these moments to buy on weakness.
The stock markets have reached the most important week of the year and need to show strength in order to prevent the decline from continuing. The possibility of a strong upward acceleration still remains. However, it is fair to say that the retracement of the last days is creating the conditions to end the bullish rally of the last weeks. We should have an answer this week.
DE30 – The DAX reached again our weekly realisation area 13,411-497 on Wednesday, stopping within the 13,460 area. The price made an adjustment to balance the lag against the US indices. On Thursday and Friday the German index accelerated downwards with some strength without breaking strong support around the 13,020 area marked last week. On the contrary, it made a powerful rebound there and on Friday the price reached the 13,144 area.
Towards the beginning of this week, the Dax should recover the 13,312-345 area in order to restart but only the break-down of 13,435 would open the door to a new uptrend. If the price remains in the 13,020-13,390 range, we will see a lot of false signals and therefore we should act with extreme caution.
The weekly target remains 13,472-497. Above 13,525, the target remains the February resistance at 13,650-750. From here on, all-time highs, perhaps 14,000 points are still a possibility this week.
On the downside, support levels 13,142, as well as 13,020 have been touched. The possibility of a strong downward acceleration increases considerably if the price returns to the 13,000 points area. In this case, the 12,723-635 area is the first relevant support, so we cannot exclude the reaching of this area in one or two trading sessions. We also remind you that this area is the monthly support zone; a strong break-down of 12,500 points level would open the door to further falls.
Key supports remain at around 12,155-12,237 and 11,766. Below these levels, we should expect a trend change. If 11,542 is breached, the first targets are identifiable near area 11,214-11,095; from here possible falls down to 10,766-10,480 last reached on May 15th.
US30 – The Dow Jones ended the week “literally” glued to the 30,098 area. Despite the new all-time highs reached on Wednesday around the 30,320 area, the price gradually began a corrective process until Friday due to some less than brilliant macro data and numerous doubts about a new economic stimulus which dented confidence somewhat.
This week’s price movements confirmed again the strength of support near the 29,618 area. This area might determine the trend of the index for the coming weeks. Above resistance 30,098, price has touched area 30,320 marking a new resistance near area 30,232-30,290. The views expressed in the last weeks, price projection in the area 30,715-31,000 points, remains strong.
The 30,000 points level remains a strong psychological support level. Volumes are weak and buying pressure remains without strong momentum.
If the prices manage to keep below 29,851, we may have corrective movements that could lead to a test of the weekly support at 29,618. Surpassing these levels will indicate strong presence of sellers in the market.
Only the loss of the weekly support 28,880-29,119 could suffice to adjust the current trend in the short term. Below it, we have the intermediate support around 28,319-28,051. A close below 27,762-625 would undermine the current bullish scenario.
Area 27,019-26,650 is extremely important. This area has been successfully tested and has led to strong bullish momentum. Sellers will come back strongly if the 26,110 level is breached. The decline may extend to the main low of July 30th at 25,777. This is a potential trigger point for a new downward acceleration with three potential main lower targets at 25,399, 25,149 and 24,680. Annual support at 24,309 is of paramount importance.
IMPORTANT NOTE – As mentioned last week, volatility increases in the opening hours and then keeps the price in range for hours. During events such as the FED conference, watch out for price bursts. It is advisable to operate on pullbacks and not on breakouts in order to avoid possible bearish or bullish traps.
Research provided by Giancarlo Prisco
The given data provided contains additional information, forecasts, analysis and market reviews published on the Key to Markets website.
Before making any investment decisions, you should know that:
– Key to Markets publishes analysis of any kind solely for information purposes and should not be construed as investment advice or recommendation.
– Key to Markets will not be liable for any loss or damage arising from any such decision.
– Whilst all reasonable efforts are made to ensure that all content sources are reliable and that all information is presented, as far as possible, in a comprehensible, timely, accurate and complete manner, Key to Markets does not guarantee the accuracy or completeness of any information contained in the analysis.
– Before making any investment decisions you should understand how leveraged products work as they are speculative in nature and may result profit and losses. Please, before starting to trade, you should make sure that you understand all the risks (insert in risk a link to go to risk warning or terms and conditions).