(REUTERS) -- European shares hit a 5-1/2-month high on Tuesday before closing above a key resistance level, boosted by automobile and mining stocks after Chinese economic data raised hopes the country would further ease its monetary policy to stimulate growth.
The FTSEurofirst 300 index of top European shares finally managed to end above key technical level of 1,028 points, a bullish signal, after several failed attempts. It closed 0.9 percent higher at 1,034.40 points after climbing to 1,038.37, the highest since early August.
Autos, up 2.8 percent, and basic resources, up 1.4 percent, were among the top gainers after the news that China's economy grew at 8.9 percent in the fourth quarter of 2011, its weakest pace in 2-1/2 years but slightly stronger than the 8.7 percent that economists had predicted.
China's gross domestic output rose just 2 percent from the previous quarter, suggesting to some economists that underlying momentum was slowing more rapidly than headline data implies.
Equity markets are benefitting from news from China. However, it is not due to the strength of the figures but because the slowdown in China is creating high hopes that there will be a big round of stimulus, Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said.
This explains why the cyclical part of the market is getting the largest part of the attention. Technically, equity markets are trying to stage a breakout.
The FTSEurofirst 300 index closed above 1,028 - a critical resistance area where the 200-day moving average, the medium-term downtrend and a previous intermediate peak all coincided. The index made several attempts this month to breach and stay above the level, but had failed.
Prices have pushed above the key resistance threshold at 1,028, but there is a high risk of a bull trap, said Nicolas Suiffet, analyst at Trading Central, pointing to a technical term that refers to false signals indicating that a declining trend for an index has reversed.
The trend line support is set around 1,018. As long as the level is not penetrated, the bias is bullish towards 1,068, which is a former key horizontal threshold. Alternatively, a break below 1,018 would validate a bull trap and would call for a drop towards 994.
VOLATILITY TO STAY
Analysts said they needed to see move evidence before declaring that the downward trend had reversed.
Trading conditions look set to remain volatile at least for the next two to three months, until we know better if the government bonds, which will come to the market, are absorbed more easily, said a strategist at a European investment fund company that manages more than $400 billion.
We are still ahead of a reporting season which is going to be more challenging than the third quarter. I would not make a claim here that this is going to be the start of a prolonged upward trend.
Citigroup's fourth-quarter profit fell 11 percent and missed Wall Street estimates as the European debt crisis battered capital markets, hurting trading revenue and discouraging clients from doing deals.
Further focus will fall on U.S. banks as they continue to report earnings this week, with any further disappointment likely to cap European shares' gains and keep them stuck bouncing off those Autumn 2011 highs, IG Markets trader Will Hedden said.
Some analysts remained positive saying the investment community gets a lot of cash at the start of a year and there is a growing appetite for riskier assets as money is put to work. A string of better economic figures, especially from the United States, have also prompted investors to buy equities.
From the valuation point of view also, equities looked good, they said. According to Thomson Reuters Datastream, stocks on the STOXX Europe 600 index traded at 9.9 times their one-year forward earnings, against a 10-year average of 12.9.
Acquisition activity also supported the market. Sweden's Svenska Cellulosa Aktiebolaget rose 9.8 percent in strong volume after it said it would sell its recycled packaging operations to DS Smith.