Levels to watch: FTSE, DAX and Dow

In Europe yesterday the ‘rally without end’ got another boost, but the US response to European Central Bank comments was muted. While markets do not want to go down, they haven’t yet found a reason to go up.

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Source: Bloomberg

Mario Draghi’s usual trick of saying warm words about accommodative policy was enough to spark a rapid turnaround in European indices yesterday, while a good performance for the mining sector provided a firm foundation for FTSE gains.

Mr Draghi’s comments certainly meant that the impact of Japan’s slide back into recession was short-lived, confounding bears who had been hoping for further declines. However, even with the bounce yesterday, there is still cause for concern, with tomorrow’s Federal Reserve minutes being an event of key importance for this rally.

FTSE at 200-DMA

Yesterday’s rally has carried the FTSE 100 all the way back to its 200-DMA, last seen on 25 September. Since then we have travelled almost 1300 points, first down and then up. For the first time since the beginning of September the index is overbought on the daily relative strength index, although, as the action on the Dow has taught us, that is not necessarily a sign that a drop is coming.

A close above the 200-DMA targets the 6900 highs of September, with a potential first hurdle around 6770. Moving to the hourly chart, any pullback could find support around 6650 and then 6610, the 50- and 200-DMAs, especially with the intraday RSI now at overbought levels.

Dax trapped below 9400

The bounce seen on Monday afternoon will have caught many by surprise, although the index still remains trapped below 9400 and the 100-DMA. A close above these two levels would put the index on course for 9510, around the 200-DMA, and then clear the way for gains towards 9700 and 9850.

The 200-hour MA was broken once again yesterday, the buyers having firmly stepped in at 9150 and below. Intraday targets on the upside are now 9400 and then 9450, while support is likely at 9300 and then 9250.

Dow seeks reason to rally

The Dow seems content to remain overbought on the daily RSI, even if progress above 17,600 has been difficult compared to the easy gains of late October.

Holding back the index at the moment is 17,700, but so far in this rally resistance levels have been treated as targets to be broken rather than areas to be respected.

A drop back points to 17,525 and then 17,325 on the daily chart. On the hourly chart the touch of the 200-hour MA, the first such event in this rally, provided a buying opportunity, as buyers arrived to support 17,550. However, until the price moves above 17,700 this looks like a market in search of a reason to rally rather than one driven by wild optimism.

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