Obviously, the recent rise in the stock market in Europe is the result of a strong devaluation in the European currency. The Euro has fallen sharply in recent weeks, as seen on the daily Euro index chart, which is the result of a very bullish U.S. dollar. Because of that, the value of stock markets in Europe got a boost, to ‘compensate’ for a weaker currency.
The Euro Stoxx 50, which is tracked by the SPDR EURO STOXX 50 ETF (NYSE:FEZ), is the leading index of the 50 largest companies in the Eurozone. Its chart looks very constructive. After a long stabilization period, the index is now on the rise. We give this recent rally a very high importance because it came with a breakout after a declining trend since European stock markets peaked 20 months ago.
Why European stocks can easily go 15% higher
Given this chart setup, we see this European stock market index rising easily another 15 percent until it approaches resistance. We would not necessarily count on a break to all-time highs, although we do not exclude it, but to stay of the safe side one can count a rise till the 3700 area in the Euro Stoxx 50.
Why 15 percent? The point is that this rally has quite some bullish energy. The reason is that it took out a strong resistance line, the one drawn in purple on below chart. The stronger resistance, the more energy the breakout. Moreover, the next resistance area will be right below all-time highs, around the peaks of summer 2015. That is how we came to our target of 3700 points.
As Euro Stoxx 50 is the leading European stock index, we believe the German DAX and French CAC 40 will also follow this trend.
FEZ shares were unchanged in Tuesday morning trading. Year-to-date, the largest ETF tracking the Euro Stoxx 50 has fallen 4.71%.
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