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CAC 40 Forecast: French Stocks Ready to Overcome Key Fibonacci Resistance

cac-40-forecast:-french-stocks-ready-to-overcome-key-fibonacci-resistance

Key Talking Points:

  • Smaller stocks gather attention
  • France has the fourth highest number of Covid-19 cases in the world
  • Fibonacci levels are a key indicator to watch

Stocks were unable to hold positive momentum on Tuesday as market optimism over a vaccine stalled amid ongoing spread of the virus and social restrictions. But this wider-themed rotation of capital is likely to continue despite it not being as bold as it has been for the past 7 days.

In fact, smaller stocks are the ones that have benefited the most from this shift in momentum in the past week, alluding to the “size effect”, which contends that smaller stocks will have greater returns over time, all else equal. We are also witnessing a slight shift from US stocks to more risky European stocks, given US tech firms have been the safe-haven traders have looked for during the pandemic. In general terms, up until the month of September, US indices had managed to grow between 60% and 80% since the low in March, whilst European indices peaked at around 40%, excluding the DAX 30, which has been the outperformer in Europe. This may allow for European equities to have greater growth potential going forward, because they lagged during the summer months and now might have room to catch up.

EUROPEAN EQUITIES OUTPERFORM THE US AFTER VACCINE NEWS

This alone may be a positive factor for European equities, given they are mostly made up of value stocks which now seem to be in high demand. But caution is still present as investors worry about the future of these hard-hit economies, especially heading into the summer season of 2021. A fruitful vaccine in the next few months could perhaps remove most of this uncertainty, allowing for European stocks to realise their full potential in a forward-looking scenario, where economic recovery is likely to take its natural course.

FRANCE SURPASSES 2 MILLION CASES

But for now, Europe remains as the hardest-hit region of the second wave. France, where total cases have surpassed the 2 million mark, is the European country with most cases, and fourth in the world, only after the US, India and Brazil.

Source: Refinitiv

The country is currently under a 4-week strict lockdown imposed at the beginning of November, but its health minister has recognized that these efforts are bearing fruit, as new cases are slowly starting to decline. This might allow locals to be hopeful about saving the Christmas period, an important spending period on which the growth of the economy will probably rely on in Q4, after what can be expected to be contractions in October and November.

CAC 40 Daily chart (05 July 201918 November 2020)

Looking at its daily chart, France’s CAC 40 stock index seems to have been caught under its 76.4% Fibonacci retracement from the 6111 to 3502 drop, an important area to surpass if it wishes to catch up with its US counterparts. This appears to confirm 5495 as a short-term resistance, but momentum indicators suggest a continuation of the upward trend, therefore putting focus on 5705 as the next hurdle, an area of increased selling pressure in the past. On the flip side, a move below the 61.8% Fibonacci at 5114 will invalidate this trend.

When referring to technical analysis, I think Fibonacci levels are a key indicator to focus on at present given that they allow for comparison between different assets on the health of their recovery from the coronavirus-led moves. Especially as we start to see a light at the end of the tunnel, an important strategy may be to look for undervalued/oversold stocks that appear to have compelling growth potential given the end of the pandemic, and Fibonacci levels are a great tool to do that on a wider, index level.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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