Morning Comment: Europe Breaking Key Support Levels

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The last thing President Trump wanted this week (the week before the election) was a significant increase in Covid cases in the U.S. around the globe...and a substantial decline in the stock market...but that’s exactly what he’s getting. (The right wing conspiracy theorists must be apoplectic today.).......If the DJIA opens where the futures are telling us it will open as we write (down 600 points), that index will be down more than 5% so far this week! No, the DJIA is not the index that most people on Wall Street follow most closely, but it IS the index that most VOTERS follow most closely, so this is a bad week for the GOP.

Today’s weakness is being led by an outsized decline in European stock markets...due to further fears about the strength of this new wave of the coronavirus...and the lockdowns that will go with it. We highlighted the fact that Germany’s DAX was close to testing key support Monday morning...and it has broken that support today. As we said two days ago, the DAX had already broken well below its trend-line from March...and was then testing its 200 DMA (which had provided solid support since June). This week’s more than 7% decline has taken it well below that line, so unless it bounces back and regains that line immediately (like it did in mid-June), this is going to be a very bearish technical development for Europe’s most important stock market.......We do need to point out that the DAX is becoming oversold, so a quick bounce-back is not out of the question, but today’s action still raises a big yellow warning flag on Europe.

As for the broad STOXX Europe 600 Index, it is also breaking down, but the 200 DMA has played a different role on this index. The 200 DMA has actually been providing very strong resistance for that index this summer. It has bumped up against it a zillion times this during those summer months (and even broken it very slightly a few times), BUT it had never been able to break above it in a meaningful manner. It had been trading in a tight sideways range since June, so it’s inability to breakout to the upside was not yet a negative development. HOWEVER, it has broken below that sideways range today. It’s not a major break-down yet, so like it is with the German DAX, a sharp/quick rebound will allay our concerns. That said, any downside follow-through is going to turn the new yellow flag into a big red one very quickly.

Having said all this, we do need to point out that another index in Europe we are watching VERY closely has NOT broken below its all-important support level yet. The STOXX Europe 600 Banks index is still holding the $80 “line in the sand” support level. Since the European banks have BADLY underperformed the rest of the European stock market for all of this year, the broad European market could fall without a further decline in banks. However, if (repeat, IF) the banks on the other side of the pond do indeed break below their vitally important support level, it’s going to be INCREDIBLY bearish for stock in that part of the world. (FYI, the European bank index is down 44% since February...vs. an decline of “only” 15% for the DAX.)........In other words, the action in the European market over the coming days and weeks will be vitally important for the rest of the global markets (and maybe even more important than the U.S. election)!!!

Moving back to this side of the pond, this morning’s move in the S&P futures means that the S&P cash index will open well below its 50 DMA. That’s negative, but it won’t be the end of the world. The much more important support level for the SPX is the late September lows of 3237. Any meaningful break below that level will give the S&P a very important “lower-low”...and take us below the trend-line from the March lows. More importantly, it will give us that “lower-low” AFTER a “double-top”. Therefore, if (repeat, IF) the S&P were to break those September lows in a significant manner, it’s going to raise a serious red flag on the U.S. stock market as well.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Oct 28, 2020 — 9:10 AM
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