* FTSEurofirst 300 flat, Euro STOXX 50 down 0.3 pct * RBS, Software AG drag down banks, tech sectors * Major stock indexes near "overbought" territory By Atul Prakash LONDON, Jan 29 European equities steadied near two-year highs on Tuesday, with weaker banking and technology shares offsetting positive sentiment after a strong start to the earnings season and a brightening economic outlook. European banks fell 0.8 percent to top the fallers list, led by a 4.9 percent drop in Royal Bank of Scotland on a Wall Street Journal report that the bank was nearing a $785 million settlement with U.S. and UK authorities over claims some of its employees submitted false Libor rates. The market also came under pressure from weaker technology stocks, down 0.6 percent, with Germany's Software AG falling 14.5 percent after saying it expected 2013 earnings per share to be down from the previous year. At 1214 GMT, the FTSEurofirst 300 index was down 0.02 percent, or 0.20 points, at 1,172.77 after opening higher. The index is up nearly 24 percent from its June lows, but may not grind substantially higher in the coming days. "We are seeing clients taking a near-term bearish view, with a large number of them being short either the market or individual stocks," said Jeremy Steinson, equities derivatives trader at Killik, adding investors were looking for a pullback before re-entering the market. "We are also currently gaining downside protection via options, just to hedge out existing long-only portfolios that have ridden the market up to the current levels." Profit takers move in every time the market rallies, but the FTSEurofirst 300, which climbed to a 23-month high on Monday, has been gradually gaining on liquidity support from central banks, improving global economic outlook and robust earnings. Just 6 percent of companies on the STOXX Europe 600 index have so far reported fourth-quarter earnings, but 72 percent of them have met or beaten forecasts, according to data from Thomson Reuters StarMine. HSBC noted that retail investors were returning to equities after four years dominated by outflows, with nine weeks of inflows suggesting investors were warming up to the asset class after a six-month rally. SLOWING MOMENTUM Some analysts advised caution. "Technicals indicate that developed equity markets are now overbought and while earnings are beating, we are seeing very few upgrades following results so far," Jeremy Batstone-Carr, head of private client research at Charles Stanley. "Our overall sense is that 12-month forward price to earnings ratios no longer suggest that equities are cheap. Volumes are faltering and deal size is ebbing, indicating that the rally is losing power." Charts showed the relative strength index (RSI) for the FTSEurofirst 300 index was at 68, while it was 64 for the euro zone's blue-chip Euro STOXX 50 index, which fell 0.3 percent to 2,735.81 points. An RSI above 70 is considered as "overbought", which often results in a retreat for stock indexes. A level below 30 is seen as "oversold", attracting more buyers. The Euro STOXX 50 could face next resistance at around 2,800 points, last tested in July 2011. The medium-term target for the index is 3,050-3,080 and support is seen at 2,700, the level where a consolidation started after a rally in January. "Its momentum is slowing a little bit after a good move, but the overall uptrend remains intact. The Euro STOXX 50 is likely to defend its current levels and might not move much in either direction in the very near term," Commerzbank technical analyst Petra von Kerssenbrock said.
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