European stocks bounced back strongly in the first half of today’s session and Wall Street is set to reopen higher after a long weekend with a big gap. Oil prices have also rallied today with Brent rising for a time above the $30 handle again. The crude rally came despite a warning from the International Energy Agency (IEA) that the global oil markets could "drown in oversupply" which could send prices even lower. But with most of the bearish news already priced in, crude traders seemed happy to cover some of their short positions, leading to a rebound. In addition to the IEA warning about oil, the IMF again cut its global growth forecasts, trimming GDP to 3.4% for this year compared to its previous forecast of 3.6% in October. In 2017, the fund thinks that the global economy would grow 3.6% rather than 3.8%. Speaking of GDP, China’s economy grew 6.9% last year – although as expected, this was the slowest rate of growth since the fourth quarter of 1990. On the quarter, the world’s second largest economy grew 6.8% compared to the fourth quarter of 2014, which was slightly weaker than 6.9% expected. Industrial production meanwhile grew 5.9% versus 6.0% expected and down from 6.2% previously. Fixed asset investment and retail sales were also slightly weaker than expected. Nevertheless, stock market traders have shrugged off these concerns as they once again looked at oil prices for direction. The two assets have been moving together more or less every day so far this year, so there’s little surprise to see both assets higher today. But will stocks be able to decouple from oil, should the latter falter around the technically-important $30 handle now? Failure to do so could see stocks tumble once again.
Indeed, with the long-term charts of the major indices beginning to look rather bearish, I wonder if what we have seen so far today is a mere oversold bounce in a bearish trend or whether we are witnessing a more significant bottom being formed. So far this year, the major indices have failed to rise for two consecutive days; if this trend breaks today, then it would undoubtedly be a positive outcome from a psychological point of view. In the US, lots of companies will be reporting their results this week, and if the majority beat the already-depressed expectations then that too could provide some stimulus for a stronger rebound. But on the whole, the volatility of oil prices will likely remain the key determinant of stock market direction in the short term and any rebounds could well prove to be short-lived.
From a technical point of view, the price action on the DAX could provide a good signal as to whether or not equities have bottomed out. As can be seen from the daily chart, below, the German index was testing the underside of the broken long-term bullish trend line around 9750 at the time of this writing. Given that so many support levels have been taken out recently, and that the index is below its main moving averages, the trend is currently bearish. Thus, there is a good chance it will run into strong resistance here, as traders try to “sell the rally.” Should the index falter here, then it could eventually go for a retest of the double bottom low around 9300-25 at some stage later this or next week. A potential break below that area could then lead to renewed selling pressure. But in the event the index breaks back above the aforementioned resistance today then a more significant bounce could be on the cards, which could see the index start to make a move towards the next key resistance around 10125-10165. This area was previously support and corresponds with the 38.2% Fibonacci retracement level of the most recent downswing.
Figure 1:
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