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Levels to watch: FTSE, DAX and Dow

Friday credit rating downgrades and current price action in equity markets have a distinct 2011 flavour, and coming in to an even lower opening on a Monday morning cements this viewpoint. 

Chart
Source:Bloomberg

The combination of weak economic data, a mild case of quantitative easing taper tantrums and fears that this quarter’s corporate earnings will not be up to scratch are all adding to the sense of malaise in indices today.

The dollar has lost some of its appeal, owing to the lack of commitment from the Federal Open Market Committee to hike rates in the near term, which has also dented sentiment. The Federal Reserve does not think the US is in a comfortable enough place economically to tolerate higher rates, so this has been perceived as another reason to stay cautious.

Gold prices are benefiting from this caution, thus miners are back in favour which is helping to limit the downside in the UK benchmark this morning.

It is Columbus Day in the US and while the bond markets are closed equity markets are indeed open, but we may expect to see lower trade volumes as a result. This could very well add to the return of heightened volatility.

FTSE anchored to 6300

The fact that the FTSE price has broken below the trendline support from the March 2009 lows sounds an alarm in my view. The 5.5 year bull market now looks threatened. Support has been found at the 6250 levels, an area last traded back in June 2013. While one might expect that 6200 may come to the rescue, should we see additional selling through this 6250 level, there is really little in the way of support between current prices and the 6000 level.

The short-term chart indicates that the index was looking a little oversold so we are, for now, staying anchored to the 6300 metric. A move through 6320 could target the 50-hour MA at 6375. Above that lies resistance at 6390-6400.

DAX RSI oversold

The long-term trend from the March 2009 lows is still intact, but the medium trend from the September 2011 lows has been breached.

The head and shoulders pattern pointed out last week has completed, and price action is now below the 100-week moving average for the first time since July 2012. The 8680 level is providing a floor at this time but any close below it could target 8530-40. The daily relative strength index is rather oversold but the index may find it tough to break higher than 8800-20. Resistance will also be found at 8905.

200-DMA hindering Dow upside

The Dow Jones is trading below 16,500 and the 200-day moving average. The next support is 16,340-50, the 50% retracement of the move from the February lows to the all-time highs. The 16,600 level (38.2%) and the 200-DMA now stand in the way of upside.

Early trade in the futures market is mainly filling the gap from the Friday close so we may see a pull back towards 16,510-20 in the near term.

A break of 16,340 takes us back to the August 8 lows at 16,288.

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