Commentary: European stocks are now at a key juncture

Bear and bull statues are pictured in front of the Frankfurt Stock Exchange in Frankfurt, Germany.
Thomas Lohnes | Getty Images
Bear and bull statues are pictured in front of the Frankfurt Stock Exchange in Frankfurt, Germany.

Stock markets around the world are rallying quite nicely on Monday as Hurricane Irma did not cause as much damage as previously feared, and North Korea did not launch another missile over the weekend.

The S&P 500 and the Dow are set to see their best sessions since March 1, and their second-best gains of the year. The Dow was on track for its first 1 percent daily gain since late April.

The global rally seen Monday morning has also taken European stocks up to some key technical levels. This allows us to reiterate an issue I have focused on in the past, which is, quite simply: the European stock markets are at a key juncture. How they move over the next few weeks could and should be important to their performance toward the end of the third quarter and into the last quarter of the year.

This year, the "long Europe" theme and trade has been very, very popular (and crowded). It was working quite nicely this past spring. Back in May, for example, the Stoxx Europe 600 Index was up 10 percent on the year, while the S&P 500 was up "only" 7 percent in that time.

However, after a three-month sell-off, the Stoxx — and in the all-important German DAX index
are now underperforming the S&P 500, and that doesn't take into account currency issues.

These European indexes are still up on a year-to-date basis, so this is not a disastrous turn of events, but their technical pictures have given us some well-defined levels to watch over the coming days and weeks. Monday's rally in the Stoxx has taken it above its 200-day moving average and right up to its trend line from May, as well as its 50-day moving average.

Therefore, if it can rally further from here, and break meaningfully above technical resistance, it should be quite positive for European equities. Furthermore, they could then play catch-up with U.S. stocks.

If, however, European stocks roll back over from these resistance levels, and take out their August lows (and take the Stoxx and the DAX below their 200-day moving averages) in any significant way, it's going to be quite negative for the stock market on the other side of the pond.

All in all, the rally in European stocks since late August has helped them work off their oversold condition that had built up after a three-month decline. The action over the next couple of weeks will be important because it will tell us whether the recent bounce has legs ... or if it was just a dead cat bounce that worked off its near-term oversold condition.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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