European stocks have been rallying sharply in recent times as the ECB’s €60 billion-a-month of quantitative easing programme continues to push government bond yields lower, which in turn boost the appeal of riskier equities. Sentiment has improved further thanks to the recent upsurge in euro zone data surprises. As a result of the intense buying pressure, some of the major European indices have broken key resistance levels, leading to further follow-up technical buying.
One such market has been the CAC index, which broke through another major hurdle last week when the psychological 5,000 mark was taken out. The French benchmark stock index has also recently broken through a key Fibonacci-based resistance area around 4740/55, which we had highlighted in detail in our last report on February 10 HERE. The fact that CAC has rallied steadily with relatively small intra-day volatility is indicative of a strong bullish trend. Indeed, this is highlighted by the Relative Strength Index (RSI) hovering around the 70 mark for a sustained period of time, which violates the bearish “overbought” argument. That however is not to say that the market will not stage a sell-off; rather, that the probability of the bullish trend to continue is higher than under normal conditions when the RSI is at 70.
With the 5000 threshold broken now, this level may turn into support upon retest in the near future. Another potential level of support to watch is 4975, which as well as a resistance-turned-support also corresponds with a bullish trend line. Therefore, until and unless the index breaks below 4975, the path of least resistance remains to the upside. That said however a few more Fibonacci-based resistance levels are fast approaching which may at least encourage some profit-taking. These are:
From the last of the above-mentioned Fibonacci levels it should become clear that CAC has not yet fully erased the losses suffered during the Great Financial Crisis. It is therefore massively underperforming the German DAX index, which surpassed 12,000 for the first time today, and the UK’s FTSE, which hit a fresh record high a couple of weeks ago before pulling back slightly. In other words, the CAC has potentially a lot of ground to make up. This makes it even more bullish.