Levels to watch: FTSE, DAX and S&P 500

After a stormy start to the week, it looks like key support levels are holding, as we await testimony from Fed chair Janet Yellen. 

Data board
Source: Bloomberg

The big question now is whether indices have stabilised for the time being and will go higher from here. Price action certainly points to the possibility that another bounce is in the offing (within the context of a general downtrend).

With little economic data of note this week, sentiment data becomes our best guide to the market, and it appears that it is reaching levels that can suggest a tradeable rally is on its way. The Investors Intelligence reading is always a good place to start. The reading for the week shows the percentage of bulls down to 24.7%, the same level as in late September. Crucially however, the bull/bear ratio is now below one, as seen in the chart below:

Source: Investors Intelligence

Frequent dips below one will indicate that we are in a bear market, but still offer the possibility of a rally. Indeed, previous instances when the readings were this low were September 2010, when QE2 was announced, October 2011 and then September 2015. All these marked short-term bottoms in the market.

The next clue is the percentage of equity index members above their 20-day simple moving average (SMA). The FTSE reading slumped from 69% at the beginning of the month, to 16% today, with signs of a bottoming process. For the S&P 500, the reading has flattened out at 35%, from above 60% ten days ago.

Price action needs to back up these indictors, but with Yellen on the calendar for today, the market may well have the catalyst for the bounce it is looking for.

FTSE 100 bounce looks possible
Yesterday saw another move lower for the index, but crucially attempts to push below the January low around 5600 failed to succeed. If this support level continues to hold, then the chances of a bounce begin to rise.

It will need a move through 5700 today or tomorrow, but if the index can get back above 5740 in coming sessions the signs look good for another bounce towards 5900 and potentially higher. If the index falls through 5600 and closes below this on the daily chart, then the areas to watch become 5520 and then 5446.

DAX seeks to recover
With this index once again oversold, the bears seem to be in control. So far this morning a test of the 50-hour SMA (8948) has seen selling resume. Yesterday the index held above key support at 8910, but it is probing below it this morning; however, so far yesterday’s lows at 8794 are still holding.

If the index can recover 9000 then we look towards targets around 9063 and then on to the August/September 2015 lows at 9300 as the next upside target. A move below 8910 leaves the way clear to 8794, 8650 and then the October 2014 low at 8350.

S&P 500 rallies
While yesterday didn’t deliver much in the way of good news, the fact buyers were able to hold the index above the August 2015 low of 1834 and then 1850 provides some succor for optimists. Further moves above 1860 would add to the view that a move higher is in the offing, although yesterday’s high around 1868 still needs to be cleared.

If the rally takes off in the coming sessions, 1873, 1890 and then 1911 become targets. Bears will need to clear 1834 and then the October 2014 low of 1819 (plus the January low of 1811) to really get a downside breakout going. 

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