Zak Mir’s midweek missive – Europhiles and bunga bunga’s!

Given that I live in Spain, and have a Spanish wife, it may be that I could be regarded as something of a Europhile. This is not the case however, I can assure you (and Nigel Farage fans!!). The nightmare of a Spanish economic collapse over the past five years has affected many people I know, and the tepid response of various politicians frustrates me, aswell as cow-towing to “she who must be obeyed” – Frauline Merkel!

It seems that people in the UK have not and will never understand the concept of the EU – good or bad. It just seems to be a blind spot and so maybe Great Britain is better off out of it?

Coming back to the financial markets and we can see a relatively clear pattern. Ever since the darkest days of the EU crisis / the PIIGS bailouts and the various domestic banking collapses, the message has been that one should have been buying the numerous dips that we have seen along the way. It would appear from the charts of key European stock indices that I will present below that the latest declines for the Spanish, Italian and even German shares are, so far at least, only modest and welcome corrections after the sharp post November recovery seen in these indices.

IBEX 35

How can I be so confident? Firstly, years of experience! But, perhaps rather more concretely for current purposes, in the case of the IBEX 35 shown below (the Spanish blue chip index) it can be see that we are already in dead cat bounce mode. The 10% decline from last month’s peak has not only bounced off an uptrend line from October at 7,900 but we ahve also seen a bounce from a falling RSI support line in the oscillator window and a 7,927 December gap fill which backs the idea that there is more to come.  My favoured scenario here is for another gap fill – this time to the top of the second January gap down at 8,362.  Above this would be difficult near term given the double gap down, something which has to be regarded as ominous unless proved otherwise.

MIB 30

As far as the Italian index is concerned, we have seen an equivalent rebound to that experienced by the IBEX with the MIB bouncing off the floor of a late December gap floor. There is also an October RSI support line and November price channel floor at  16,400. At least while there is no end of day close back below the November support line, the view is that this market should at least head back to test broken January neckline support at 17,195 over the next couple of weeks. Those who are more bearish than I am, or those who wish that Silvio “Bunga Bunga” Berlusconi  would head off to the nearest retirement home (!) would probably use any end of day close back below the 16,400 level this week as their momentum sell signal. But as I said, I do not think the situation is that bleak here just yet.

DAX 30

Perhaps the only real reason that we are not looking at a nightmare scenario for the PIIGS indices just yet is of course the German economic powerhouse. Here, on the Dax, it is evident that we are still looking at an ultra strong market, a point witnessed by the way that so far on Tuesday at the time of writing, we have seen the low of the day come in above the 50 day moving average at 7,614. This is a buy signal in itself, with the dip of recent days an opportunity to go long using the 50 day line as an end of day close stop loss. At this stage, it is not rash to suggests that while above the 50 day line / October price channel floor that the upside for this market could still be a final blow off move to the 4 month resistance line projection as high as 8,000 over the course of February.