Levels to watch: FTSE, DAX and Dow

Ahead of a key event in the US this evening, markets are stabilising after a choppy session yesterday. 

A chart
Source: Bloomberg

Japan and China continue to see gains in markets, while yesterday’s dip for the DAX was merely a reminder that this particular index can go down as well as up. The big event of the day is of course the Federal Reserve meeting, with the decision announced at 6pm (London time). The broad expectation is still that ‘patient’ will be removed, but given the weakness of US data outside of job numbers and the persistence of low inflation I would not be remotely surprised to see the magic word stay, along with commentary on how a stronger dollar is providing some headwinds for economic growth.

If the statement does contain ‘patience’, and thus is regarded as dovish by markets, then we could see a noticeable unwinding of the dollar trade that has dominated for the past two weeks, with a commensurate rally in US indices. The bounce is continuing on Wall Street, and while European markets might tread water today, there is little reason to suspect that the bullish run is coming to an end.

FTSE targets 6960

Having broken the 50-day moving average at the beginning of the week, the FTSE 100’s rush higher has now reached the 20-DMA. This is hardly likely to be significant resistance, particularly if the Fed is dovish tonight, and so we look towards the 6960 area as the next target, and then on to 7000.

Momentum indicators such as the relative strength index and stochastics have turned firmly higher, and with plenty of room before hitting overbought levels still available we could see a substantial bounce from this point onwards.

As before, only a move below 6700 and the 200-DMA turns this scenario on its head, with buyers likely to be rewarded in coming sessions.

DAX stochastics still bearish

Yesterday’s retreat from all-time highs is still in progress today, providing perhaps the first real dip in a number of sessions. We look towards the rising trendline prevalent throughout March, which would suggest support around the 11,800 level.

On the four-hour chart the index has found support along the line of the 20-period exponential moving average (EMA), while stochastics in this timeframe remain in a bearish pattern. Dip buyers should be on alert, however, as a turn higher in this indicator would signal that the pullback has run its course.

Going back to the daily chart, even a drop towards the 20-DMA at 11,520 would still leave the index in a bullish frame of mind.

Dow RSI pointing higher

A dip yesterday saw buyers step in around the 50-DMA, while this morning futures are pointing to further gains, tempered with caution ahead of the Fed meeting.

In the short term, a continuation of the bullish trend would require a break through the 20-DMA and the 18,000 level, which would clear a path to a test of the all-time high. With the daily RSI and stochastics pointing higher, I continue to expect the Dow Jones to rally, a picture replicated across other indices in the US such as the S&P 500 and Nasdaq 100.

The breakout to new all-time closing highs in the small cap Russell 2000 is perhaps the most compelling argument for the bulls. This index often leads its larger brethren in rallying, as was the case last week. If the Russell is anything to go by, 18,300 and more is the likely outcome in the Dow.   

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