Levels to watch: FTSE, DAX and Dow

The week has started well for equity indices, with gains being registered across the board. A lack of weighty economic data however, and signs of possible overextension are flashing amber warning signs for traders.

DAX sign
Source: Bloomberg

It was a disappointing end to the week after non-farm payrolls on Friday, with the weaker number providing something of an excuse for profit-taking at the close of play. With only Chinese CPI on the docket for the day, and that already out of the way it seems that the day, in economic terms, is essentially over already. Markets face a tricky couple of weeks now as US earnings season winds down and economic news takes a rest. UK earnings may help to lift the FTSE 100 in the short-term but we are still seeing hesitancy below 6600.

I still think that we will see the usual rally into the year-end, but with two weeks until options expiry and some overbought readings on major indices, a period of weakness would not be surprising.

FTSE eyes 6690

The 6600 level proved to be a step too far on Friday and we are operating below it today. We have broken through the 50-day moving average on this index, with a daily close above 6600 signalling that the target has become the 200-DMA at 6690.

Unlike other indices the FTSE 100 is not yet overbought, which suggests there may still be some upside here. However my favoured indicator, the stochastic momentum indicator (SMI), is sitting in overbought territory and the curve here has flattened out, which makes me wary of chasing this market.

Targets on the downside are 6530, then 6475, with a near-overbought reading on the hourly chart suggesting we might soon witness a test of the 200-hour moving average.

DAX SMI lower

The final two days of last week saw an attempt by the DAX to punch through the 100-hour MA and close firmly above 9400. Although it did finish above 9400 on Thursday, it fell back on Friday and we are now well below this level. The index tested the zone just above 9200 in early trading, although buyers stepped back in to hold the index above the 50-day for the time being. A close below here would point the way to 9150 and then 9000.

Crucially the SMI is moving lower, and while it might be early to go short it does not appear to be a time for fresh long positions. For now the 200-hour MA and the uptrend line from 16 October are still holding, with buyers looking to prop up the index around 9250. The short-term target remains the 6-7 November high around 9450.

Dow could target 17,440

It has not been wise to call tops in this rally, but for now the 17,600 level is proving to be resistance here. The index is heavily overbought, which should be a red flag, and with such a distance to the 50-DMA (c 2%) and the 200-day moving average (4.8%) the move higher may finally have run its course. A pull back to the long-term trendline at 17,200 would provide the dip that many are looking for, without impairing the longer-term bullish picture.

The Dow Jones has slipped below the trendline from the 16 October lows, although it is still holding the 50-H MA for now. Intermediate downside targets are 17,440 and then 17,300.  

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