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European indices open lower after worst Wall Street rout in two years

Technical outlook on FTSE 100, DAX 40, and Dow after disappointing US retailers’ earnings.

​FTSE 100 drops as inflation hits 40-year high

The FTSE 100’s 5% rally from last week’s 7,157 low, made close to the February low amid volatile trading due to recession fears, abruptly ended yesterday as the UK annual inflation rate rose to a 40-year high of 9% in April, up from 7% in March.

The 200-day simple moving average (SMA) at 7,324 may act as support today, together with the 7,299 April low. While this is the case, the 55-day SMA at 7,423 may be revisited.

Only a rise above yesterday’s high at 7,545 would push the 7,621 early May high back to the fore. Above this level key resistance remains to be seen in the 7,657 to 7690 region which is made up of the January 2020, February, and April highs and as such is likely to cap.

Bearish Engulfing day points to lower levels

The DAX 40’s 6% recovery rally from last week’s 13,275 low, triggered by investors buying stocks at discounted levels in sectors such as commodities, healthcare and utilities, came to a sudden end yesterday when a Bearish Engulfing pattern was formed on the daily candlestick chart.

This occurs when the red (bearish) body of the candle – the distance between the open and close of that day – “engulfs” the previous day’s body. Further slips are thus in store with the April low at 13,538 representing a possible downside target. Below it the three-month support line can be found at 13,410 and the current May low at 13,275.

While the index remains above this month’s low at 13,275 on a daily chart closing basis, however, this week’s and the early May high at 14,282 to 14,315 may still be revisited. If bettered, the late April peak at 14,599 would be next in line.

For a longer-term bullish picture to emerge, a rise and daily chart close above the late April high at 14,599 needs to take place, though.

Worst fall in the Dow for two years has the 31,227 current May low in its sights

The rout in the Dow Jones Industrial Average is ongoing with it posting its biggest decline since June 2020 - over 3.5% - as disappointing quarterly earnings from major retailers weighed on the index.

The sharp sell-off came as major US retailers’ earnings indicated that inflation squeezed corporate profits. Target shares tumbled 25% in their worst drop since 1987 after the company missed analyst expectations amid higher prices and supply bottlenecks while cutting its profit forecast due to a surge in costs. Walmart stocks fell by 6.8% due to similar issues.

A slip through the current May low at 31,227 would engage the March 2021 low at 30,545 and possibly the major 29,871 to 29,194 support area which consists of the February 2020 pre-pandemic and August 2020 highs, December 2020 and January 2021 lows, 38.2% Fibonacci retracement of the 2020-to-2022 advance and 200-week SMA.

Were the Dow to stabilise around its 31,227 recent May low, the February low at 32,234 may be retested.

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