This article is written exclusively for Investing.com.
European equities fell sharply this morning following the news of the Austrian lockdown. The losses were led by the Spanish and Italy, who each lost about 1%, while the Germans were less badly hit. see further losses to the DAX. As the weekend approaches, there is a risk of opening gaps next week as the COVID-19 situation worsens and more lockdown measures are put in place elsewhere.
Indeed, the coronavirus has returned unwelcomely in recent weeks, with cases rising to record levels in Germany and Austria, despite continued vaccination efforts.
In response, the Austrian government has responded A full lockdown has again been imposed and vaccination made mandatory. Meanwhile, German Health Minister Jens Spahn has also refused to rule out a return to lockdown in Germany.
Concerns that similar lockdown measures could be introduced in other parts of Europe weighed on sentiment. There is now a risk of a near-term correction as investors become aware of the risks facing the euro-zone economy after major stock indices hit repeated all-time highs in recent weeks.
Admittedly, more lockdown Measures have given the European Central Bank even more reason to stick with its current policy even longer. This, in turn, should mean limiting downside risks to equities. Moreover, with the weakening, this should be good news for European exports.
Still, investors will have very little reason to buy this latest dip before the weekend. Therefore, there is a good chance that we will see further weakness towards the European close and possibly further losses in the early parts of the week ahead.
After today's sell-off, the DAX is forming a bearish engulfed candle on the daily timeframe, which if complete would be a major reversal sign:
intra-day basis, if we see acceptance below Thursday's low of 16,193, which I think we could, then we expect further losses towards the end. The losses may accelerate if and when the bullish trendline breaks.
The main target for this bearish outlook is the shaded area on the chart, between 15,985 and 16,030, the previous zone of resistance twisted support. While it's possible we'll see an even deeper pullback, we'll first need to see how the index behaves in the above support area if and when we get there. The subsequent bearish target is around 15,690.
It is also worth pointing out that the Relative Strength Index (RSI) has been in a state of negative divergence for several days at "overbought" levels north of 70. So far, this has only been a warning sign that the tide could turn. But now that a bearish engulfed candle could form on the highs, the bears could get the confirmation they've been waiting for.
So, in addition to long-term profit-taking, bear-camp short selling is an additional pressure that could be introduced as more and more short-term support levels fall.
