Levels to watch: FTSE, DAX and Dow

The new week has opened with markets firmly in profit-taking mood, as news headlines are dominated by expectations of US rate increases later in the year.

A chart
Source: Bloomberg

Such a strong jobs report on Friday underscores the pressure on the Federal Reserve regarding US rates. If the Federal Open Market Committee drops ‘patient’ from the next statement then markets will move into a higher gear, anticipating a potential rate increase within the next two meetings. After such a strong run higher, most indices were looking overextended; with the European Central Bank’s quantitative easing news now more or less priced in, we can expect this week to have a much weaker tone to it than the one just gone.

FTSE’s bearish outlook continues

As I noted last week, the real test for the FTSE 100 is whether it can hold above the rising trendline off the December low. This is now being tested this morning, and given the broad selling we’ve seen so far the likelihood is that we will see a daily close below this line.

Immediate support in this eventuality lies around 6800, and then the 50-day moving average at 6750. Unsurprisingly, the first target on the upside is the current peak around 6960.

Last Wednesday’s low around 6860 is a potential area of support in the short term on the hourly chart, but with the 200-hour moving average turning lower the bearish outlook remains.

DAX off all-time highs

Having been one of the strongest performers so far this year, it would be unwise to write off the DAX and declare a pullback is underway. From the daily chart today’s move back from all-time highs is barely a blip. Even a move back to the 20-DMA would be a 2.8% drop, but below that there is little support until 10,600 and the 50-DMA. On the hourly chart the rising trendline from the 10 February low is the first big area of possible support, while any bounce to the upside must look to clear 11,600.

Dow could find support around 17,650

It is US markets that have seen the most activity in recent sessions, with Friday’s move potentially creating an opportunity for a dip towards the rising trend from mid-October. This would suggest support comes into play around 17,650.

Crucially the end of last week saw a bearish crossover on the four-hourly chart of the 20- and 50-period EMAs. Eager sellers would, however, be advised to wait until the price leaves oversold territory on this timeframe, or until there is a fresh bounce in stochastics, which are also currently at oversold levels.

It is entirely possible that the post-payrolls move was overdone, and that some buyers may enter today. This could see us move back in the direction of 17,950 before a fresh move lower begins. 

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