European equities, as well as the common currency, have suffered in 2022. The war in Ukraine led to massive spending in Europe that fueled even higher inflation.
Inflation is a problem worldwide, but in Europe, it is amplified by the conflict in the East. Moreover, the European Central Bank lags behind the Federal Reserve in the tightening cycle, leading to investors losing confidence in Europe and the common currency.
However, despite all the doom and gloom, European equities and the euro have bounced from their lows. In particular, the main stock market index in Germany, the Dax, seems to have reversed course in October.
One of the reasons why the European equities are off their lows is the unexpected 0.2% quarter-on-quarter expansion in the third quarter. Moreover, technical analysis supports a further rally.
In particular, the daily chart shows more upside possible for the Dax index. A bullish divergence with the RSI and a falling wedge pattern point to a rally towards 15,000 points and, perhaps, beyond.
The Relative Strength Index (RSI) is an oscillator. It computes a value based on the past 14 trading days and travels between overbought (70) and oversold (30) áreas.
It forms a contrarian signal when it diverges from what the market does. In this case, the Dax index made a new lower low in October, but the RSI did not confirm it.
Hence, a bullish divergence formed, and a rally followed.
Besides the bullish divergence, another reversal pattern may be spotted on the daily chart – a falling wedge. Such patterns form at the end of bearish trends, and the following price action often retraces the entire pattern.
Moreover, the upper edge of the pattern has been recently broken and retested. On such a move, traders typically go long with a stop-loss order at the lowest point in the wedge and a take-profit order at the highest point of the pattern.
All in all, the Dax index looks constructive here, with the 15,000 area acting like a pivotal one. A daily close above should open the gates to further strength.
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