Market outlook

Weakness doesn´t dissappear from the market´s sentiment. We begin a key month, October, traditionally a scenario for big sell-offs. Next week it´s important to watch over supports, such as the 10.500 points of the Dow Jones. We´ll see if the oversold status that many indexes show from a long term perspective can bring about a technical recovery.

Stocks markets start their recovery

Bonds start to fall and investors seem to flee from gold. Is that a sign for the stock markets to soar?

Market outlook

The upward trend feels threatened. Supports will decide in the coming days if it will be eventually violated.

Amsterdam´s AEX could play a key role to assess the European economies´strength

Stocks markets will have to face a difficult week, mainly due to the fact that the uncertainty continues to be the most relevant feature in the short-term scenario. Weakest European markets have spread fears on investors worldwide. As a result, nor stakeholders neither bondholders have been exempt from concerns about their investments yields. So far, gold has been the refuge for frightened people, keen to flee from risky assets. However, even metals seem to have brought about doubts on their rally sustainability.

Previous weeks, attention has focused on Mediterranean countries such as Greece, Portugal and Spain and their capability to meet their financial commitments. Their 10-year bonds incremental yields reveal their overall deterioration, which, especially in the case of the Hellenic country, could finish in default. Despite the endeavours of International Institutions, such as the International Monetary Fund and the European Central Bank, which have repeatedly stated that they strongly backed those European countries that are in trouble, the euro has consistently plunged against the dollar and other currencies. This fact demonstrates that the market shows little or none conviction about the Financial regulators ´speech.

Mediterranean countries have seen their stocks markets plummeting in the last months. The Spain´s Ibex have decreased a 26% since the first week of 2010 and the Greek and Portuguese Indexes have equally undergone severe corrections. By contrast, the Dow Jones and the Germany´s Dax have become the strongholds where money has tried to look for refuge.

Market direction could be a goal complicate to forecast in the short term. Perhaps the behaviour of the Stocks Markets of some Northern European countries could contribute to clarify a short and middle-term strategy. The Amsterdam´s AEX, for instance, has experienced so far a similar movement to the German Index. Nevertheless, last week, prices broke down its 200-session moving average, which has worsened significantly its technical situation, because this index had already a negative element: its primary rising trendline had been lost at the beginning of May.

Therefore, next week the Dutch index will have to prove its ability to be free from Southern European economies ´contagion. There are two key elements which should behave as the crucial tests to determine their future for the coming quarters: the supports of 310 and 300 points. If they eventually are broken, the bearish pressure could lead the AEX to a significant correction. Otherwise, the likelihood to recover its upward structure would remain intact.

There is a single bullish technical element that could suffice to make the AEX experience an increase in the short-term: the positive divergence that the RSI is forming. However, it will have to struggle with too many negative aspects which rule over the market´s sentiment.

The technical recommendation for the AEX is to open short positions if prices break the level of  295 points. It´s advisable to set a stop loss in the level of 335 points.

European Markets: Does History repeat itself?

The technical movement that Stock markets are carrying out is very similar to the recovery cycle that they developed in 2004. At least this conclusion could be made after the analysis of the French Index, Cac 40.

The current chart compares two different moments, 2004 and 2010, which may be considered as analogous from a technical perspective.

In 2004 the market had soared a stunning 57% since March 2003. Subsequently, the Parisian Index got stuck for the whole year in a lateral range, which in the chart appears as a 12%-height rectangle. Prices hit the support of this pattern (the zone of 3.500 points) three times. Finally, it demonstrated that it was strong enough to ensure the continuity of its rising long-term structure.

Currently, the situation is very alike. Despite the collapse of the European Stocks markets in May 2010, the balance remains, as it shows the new rectangle formed by the support of 3.500 and the resistance of 4.000 points. The first level is playing a key role in the short term because it concentrates the purchasing interest. This area has been reached for three times in the last seven months as it happened in 2004.

Despite the general weakness of the Financial Markets, if History repeats itself, the main French Index could withstand the bearish pressure. In that case, the index could deploy the same movement that in 2005 when it eventually broke the top of the rectangle, which brought about a new upward impulse that led the CAC very close to an all-time high.

Consequently, the support of 3.500 points is a key level to watch over, because the likelihood of a similar move to the one that happened in 2004 will depend on its resilience. 

The recommendation is to hold. Stop loss in 3.300 points.