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The market is dominated by the usual Greek headlines - one minute Greece is going to fall off a cliff into bankruptcy and economic depression the next its European partners have graciously decided to save the Med nation.

That can be deeply frustrating for the indices' trader. At the start of the year all we heard was stabilisation in the Eurozone and oversold stocks, which were ripe conditions for risk to rally. But then volatility and uncertainty returned to the markets. So what does all of this mean?

In this environment it's really important to take a look at technical factors and specifically leading market indicators. Thankfully, there are a few indicators that cut through the soupy news pout of Europe and elsewhere and help you to understand what the markets are telling us.

1, the Vix index. This is Wall Street's fear gauge and is a good indicator of market sentiment.

2, the Transportation sector of the Dow Jones and the Russell 2000 - both of these US indices and sub-indices tend to lead overall US markets higher or lower.

3, Europe's markets have found it hard to rally unless banks are participating in the move higher, so we'll take a look at where they are.

The Vix: as you can see in the chart below, the Vix is still well below the peaks reached in October last year. This suggests that what we saw last week was a pull-back and confidence remains in the market. Thus, a capitulation in stocks does not appear to be on the cards right now and we may see a continuation of the uptrend.

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Source: Bloomberg

 

The Dow Jones Transportation sector and the Russell 2000: These two pulled back before the Dow Jones last week, but are moving higher once again. The Dow Transport index is testing its highs from earlier this week and if it can break above here then it may have another go at the July 2011 highs. The Russell 2000 tends to follow the Dow Transport, so it may play catch up going forward.

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Source: Bloomberg

 

Eurostoxx 50 banking sector: Banks in Europe remain in an uptrend and the 200-day sma held as good support during this week's pullback. It is now testing a pretty significant resistance level, as you can see in the chart below. We will probably need a neat solution to the Greek talks this weekend to extend this rally, which suggests that European stocks may find it hard to extend gains until we get over this latest Greek hurdle.

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Source: Bloomberg

 

Technical Deep-dive:

 

ESTX 50: The pan-European index sold off at the end of last week after it reached overbought territory according to the RSI. But 200-day sma and the Tenkan line (on the Ichimoku cloud) both held up well as supports, which suggests that last week's price action was a mere pullback. We need to break above the 2,530 level to target 2,600 and then 2,700.

We would urge caution however, as the RSI continues to be in quite stretched territory. Thus we may experience a deeper pullback before we march higher. Also, events in Greece could scupper things. Our advice is to follow the market and keep stops tight. Entry levels around the 2,490 mark targeting the 2,540 highs in the near term.

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SPX 500

 

This index broke higher yesterday above 1,350.If we close convincingly above 1,355 this week then we could target 1,365 then 1,390 in the next few days. Support lies at 1,340.

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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

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