European Stocks May Rally 16%: Technical Analysis

The Euro Stoxx 50 Index may rally 8 percent in January and as much as 16 percent in the next four to five months, according to Gerard Sagnier, a technical analyst at Aurel-BGC.

The benchmark jumped 2.5 percent today to its highest level since August 2011 as U.S. lawmakers passed a budget bill that avoided most scheduled tax increases threatening a recovery in the world’s biggest economy.

Sagnier expects the benchmark index to rise to a 2,850 resistance level by the end of this month. This represents the third point in a trend line that started on Oct. 24, he said. The measure may then climb to 3,060, reaching the highs of 2011 in the next four to five months, he said.

“I’m very bullish after the index surpassed a double top,” Sagnier said in a telephone interview. “This created a change in the psychology of the market.”

A double top is a rise to a new level, a decline, and then an increase to the same level. The Euro Stoxx 50 formed a double top in March and September, and breached the level Dec. 10, Bloomberg data show.

Stocks in the region posted the biggest annual rally in three years in 2012, with the Euro Stoxx 50 climbing 14 percent, as the European Central Bank’s program to purchase bonds of the area’s weakest economies helped ease concern the euro currency block will fracture.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

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