DAX extends rally ahead of ECB

European stock indices stormed higher yesterday and have extended their gains this morning ahead of the European Central Bank rate decision and press conference today. The main focus will be on whether or not the ECB would announce a plan to taper its quantitative easing program, and any comments about the euro, which has climbed to multi-year highs against a number of foreign currencies. If the central bank turns out to be more hawkish than expected then we could see some further strength in the euro and export-oriented European stocks may fall, which could be bad news for the German DAX in particular.

However, judging by the “ECB sources” headlines that have been hitting the wires during the past couple of days, the Mario Draghi and Co. may delay a decision on QE until the ECB’s next meeting in October. If so, the euro could fall, pushing European stocks further higher.

As far as the DAX is concerned, well it has spent several weeks trying to form a base around the key 12000 area. It looks like that process has now ended and is time for range expansion to the upside again – provided the ECB does not trigger a fundamental-based sell-off this afternoon. From a purely technical perspective, however, the German benchmark has formed several bullish signals: (1) a false break reversal pattern below prior support at 11941, (2) break out from its bull flag, (3) reclaiming of both the 50 and 200-day averages and (4) clearing of resistance in the 12210-60 region. This 12210-60 is now the key support zone to watch – any move below this region and the bullish view would have to be put on hold again. Meanwhile in terms of resistance, the old all-time high prior to this year’s record was at 12390.

As we are currently below this level, we may see some volatility around here. Further higher, the next bullish objective would be around the 12535-12590 area which was previously support and resistance, and where the 61.8% Fibonacci retracement level against the all-time high (12951/2) converges.