3rd May - Wait before you buy European blue chips
07 May 2013
TECHNICALS:
EUROSTOXX 50 MONTHLY CHART
There has been a strong 38% rally since the middle of 2011.
But the market is running into a critical cluster of three Fibonacci resistances and a vital Pivot from the Prior High at 2668.
Moreover, the downtrend from 2007 is far from being tested and broken.
Conventional analysis would demand that both these be broken before the bulls can really take control.
EUROSTOXX 50 DAILY CHART
Here is the detail.
The lively price action since the middle of April has driven markets above the immediate prior Highs (2685) into new territory.
Those prior highs in the short-term should act as support to ratchet the market higher still from current levels.
But the succession of longer-term influences above the market means that there are important headwinds.
If they can overcome, all well and good. But it may take time if it happens at all.
We are only buyers on a break of 2830
FUNDAMENTALS:
The Eurozone economy remains mired in a recession exacerbated by austerity policies adopted by many Eurozone member states. That is of course because they have fallen victim to the sovereign debt crisis due to excessive borrowing and too high debt-to-GDP ratios, forcing the ECB to cut rates down to 0.50 basis points. That is the same level as in the UK.
The one economy that had seemingly survived the crisis and avoided recession, Germany, is now also experiencing difficulties with recent PMI surveys pointing to recession.
So why does the DJ Eurostoxx50 rally against such a gloomy backdrop?
We think there are several reasons:
But while all of these are important in their own way, only one stands out as significant enough to support the current rally in the Eurostoxx market and we judge that to be sentiment.
The US S&P has made new all-time-highs. At first the market was driven by a recovery that appeared to be strengthening, but about six weeks ago all that changed.
Over the last several weeks data has begun to cool to such a degree that Fed officials, who had begun to talk about scaling back their QE3 policy, have now abandoned that talk. At last night’s FOMC meeting they announced their commitment to maintaining their bond purchasing policy and, if necessary, increasing it to support the economy during a period of slowing growth.
While the reason for the slowdown is clearly the “sequestration”, which could be said to be a self-inflicted wound, Congress and the President show little sign of undoing it.
However, the S&P rallies because the Fed is pumping such large quantities of liquidity into the economy that traders/investors assume the economy cannot fail to respond, so they are trading on expectations of a future recovery.
In Japan too, the Nikkei rallies even though the economy there remains mired in recession and in the grip of a two decades old deflation. But what drives the Nikkei is the expansionary policies of the current government and Bank of Japan. Again, traders/investors in the Nikkei are trading on expectations of a future recovery fuelled by an unprecedented level of monetary policy accommodation.
In the Euro zone it is difficult to see such a turn around happening any time soon. The Euro zone debt crisis remains unresolved and several of the countries that had signed up to austerity programs in return for rescue funds are now finding the burden too big to bear as their economies continue to shrink and their populations grow ever more restless in the face of rising unemployment.
Under such conditions is it likely that that recovery abroad will feed through into the Euro zone? And if it does, is would such a market recovery be robust?
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09th May - Silver Vulnerable to Further Weakness 
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02nd May - Current Support in EUR/CHF at 76.4%