I do believe it is only a matter of time before the bears come in and punish the market yet again.

The Euro Stoxx 50 rallied rather significantly after dropping in the early hours on Tuesday, as it looks like the oversold condition has caused a bit of profit-taking. Ultimately, the market is likely to continue to see the negativity around the world as something to be shorted. However, markets do not go in one direction forever, so it is likely that a bit of a rally will probably get sold into. The €3600 level is an area that we had gapped below over the last couple of days, so it does suggest that we are going to see a lot of resistance.

If we do break above there, then the market has to deal with a lot of selling pressure from the previous trading, as the 50-day EMA is currently sitting just below the €3800 level. That is an area that we would have to break above to think that the Euro Stoxx 50 would suddenly turn around. After all, the index is a collection of nine different countries, and it is likely that the index will eventually see a lot of shorting pressure.

If we did break above all of that, specifically the €3800 level, then we could see a significant turnaround to reach the 200-day EMA. That obviously would be a huge turn of events, but ultimately this is a market that still has further to go before testing the previous lows, which is near the €3400 level. The market breaking down below that level could send the market much lower, in a huge flush. That being said, I think the only thing you can probably count on is a lot of volatility, so you should probably be cautious about position sizing, and look for rallies to sell into as it should be more or less a continuation of what we have been seeing for quite some time.

As long as there are a lot of concerns coming out of the European Union, and the European Central Bank has done nothing to increase liquidity, it is difficult to imagine a scenario where the Euro Stoxx 50 takes off. I do believe it is only a matter of time before the bears come in and punish the market yet again. Volatility should remain high, which is typically a negative sign.

It is not until we clear the €3800 level that I might be willing to take a crack at this to the upside.

The Euro Stoxx 50 has initially gapped higher to kick off the trading session on Wednesday but then spent a better part of the day falling. After that, the market turned around to reach the 3700 level, but it is obvious that the market is trying to find its footing and its directionality as to where it will go next. Keep in mind that this index will track the entirety of the European Union in general, as there are so many different countries represented.

This brings up an interesting conundrum because there are a lot of moving pieces in the European Union right now, not the least of which would be inflationary concerns but even growth is a major factor. As long as that is going to be the case, you will almost certainly have problems trying to discern which areas of the stock market are going to be more lucrative. This will cause the Euro Stoxx 50 a lot of problems, but luckily, we have a couple of areas that we can pay close attention to for direction.

The €3600 level underneath is an area where we have seen the market bounce from a couple of times, and therefore I think it will continue to be significant support. This is an area that is broken to the downside and almost certainly will open up a move to the €3500 level, and then to the €3400 level where we had bounced from previously. On the upside, the €3800 level is an area that will attract quite a bit of attention, right along with the 50 Day EMA.

We have been in a downtrend for a while, and as a result, I still believe this is a market that is more likely to be a situation where people “fade the rallies” going forward unless something changes quite drastically with the overall risk profile of markets. I do not believe this is very likely, at least not in the near term. Because of this, I think you continue to build a bit of a channel to the downside but keep an eye on any attempt to pick up liquidity by the European Central Bank. That could be an issue later, and if it ends up being one, it could lift stocks. There are a lot of negatives out there right now though, so it is not until we clear the €3800 level that I might be willing to take a crack at this to the upside.

I still favor the downside but will obviously keep an eye on the natural gas and inflationary concerns in Europe.

The Euro Stoxx 50 futures markets were closed on Friday, but when looking at the chart overall, you can see that for the last week or so, we have been trading between the €3700 level on the bottom and the €3800 level on the top. Because of this, we are forming a bit of a rectangle, but at this point, I think it is only a matter of time before we have to make a decision for a bigger move.

It is worth noting that we are hanging around the 38.2% Fibonacci retracement level and had recently pulled back from the 50% Fibonacci retracement level. The 50-day EMA is sitting below the €3900 level and is drifting much lower. That shows just how strong the downtrend is, and it is worth noting that throughout the European Union, we have major issues economically. Not the least of which is going to be a potential disruption in energy.

If the energy situation in the European Union continues to be precarious, it is hard to imagine where the economy has an opportunity to go forward on a strong footing. The market will have to worry about these things, so I think it only makes a certain amount of sense that rallies will continue to see the 50-day EMA as a barrier.

The candlestick from Tuesday is a barrier to overcome. If we break down below the bottom of the candlestick, it is likely that we go looking to reach the €3600 level, possibly even down to the €3500 level. It would be a simple continuation of the overall downtrend, but I do not necessarily think it will be as brutal to the downside as it had been previously. After all, that was more or less a panic to the lower levels, and the stuff that we are worried about now is something that is already somewhat known. Because of this, it makes sense that we will fall further, but it will be a little bit more gradual. In fact, it is not until we break above the €3900 level that I would consider the market being able to go to the upside. At this point, I still favor the downside but will obviously keep an eye on the natural gas and inflationary concerns in Europe.