DAX testing key area after short covering bounce

After yesterday’s sell-off, European markets bounced back, lifting US futures with them, ahead of the publication of the US CPI report. The recovery is potentially due to short-covering, but it may also have something to do with UK bond yields coming off the boil a little. There’s some speculation that the Bank of England will be forced to extend its October 14 deadline to end its emergency bond-buying programme.

Despite the recovery, we reckon there is a risk that more losses could follow for EU stocks, as concerns about the health of the global economy continues to intensify.

The German index has accepted to hold below the March (12431) and July (12385) lows, after last week’s recovery lost steam around the 21-day exponential moving average. With the index continuing to make lower lows and lower highs, there is no reason to be positive, despite today’s bounce.

More evidence of a bottom is needed to convince us.

Otherwise, we think that the path of least resistance is still to the downside, and as such one should expect to see more losses.
If we are correct, then the bears’ next big target is the liquidity below last week’s low at 11810.