Levels to watch: FTSE, DAX and Dow

Volatility is still the name of the game after a very choppy session in US markets. With oil and copper prices sliding, the FTSE 100 has come under heavy pressure early on in the day.

Copper rods
Source: Bloomberg

A 400+ point range on the Dow Jones last night underscores how the new year has begun with much more volatility than has been seen in the recent past. This makes life difficult for the trend followers, but for those of a nimbler disposition the rapid swings offer plenty of opportunity, even if the risk level is commensurately higher as well.

This morning’s excitement has been down to updates from the World Bank and the European court of justice. The former cut its 2015 economic growth forecast from 3.4% to 3%, warning that the overall global economy was becoming too dependent on the US as the sole source of real growth. Meanwhile the ECJ (or one of its advocates-general) has issued an interim ruling that says the European Central Bank’s emergency crisis-fighting operations, namely the Outright Monetary Transactions programme, were legal in principle and that it did not break EU law.

There is limited read-across from this to any potential quantitative easing programme, since QE and the OMT are markedly different, but at least the ECJ did not throw a spanner in the works by declaring the OMT to be illegal. This removes one concern for markets ahead of next week’s ECB meeting, although it is important to stress that QE in the eurozone is by no means a ‘done deal’.

FTSE suffers as copper dives

Yet again the heavy oil and commodities component of the FTSE 100 has sent the index slumping, as copper dives thanks to the World Bank report.

The retreat from 6580 and the 50-daily moving average remains intact, while the relative strength index continues to sink below the 50 mid-point. 6450 may provide some support in the short term, but if we see the selling continue then the index is looking towards a downside target around the 6370 level, where the market found a short-term bottom around 6/7 January.

Upside targets first require a break of 6500, followed by a close above 6580. This takes us on to 6680, around the 200-DMA, however with oil and other commodities still falling it seems unlikely that the FTSE will manage to sustain a move back to the highs of December, around 6750.

The hourly chart finds the index back below the 200-hour MA again, although buyers have so far stepped in around 6450. An immediate target is still the high from yesterday around 6550.

DAX a good bet for bulls

The German index still looks the most promising for the bulls, despite its gyrations. The uptrend off the 6 January lows is still intact, with the index challenging the 9940/9950 area that stunted the December bounce. A close above here still targets the high from the beginning of December, around 10,100.

Crucially the DAX finds itself back above the descending trendline from the December highs on a four-hour chart, with a firm close above this level providing further fuel for the bulls.

The hourly chart looks healthy too, with buyers stepping in around 9780 and maintaining the uptrend for the time being. With the ECJ ruling out of the way, the next step for the DAX would be a close above yesterday’s highs around 9970.

Dow back below 50-DMA

It requires an iron will to trade the Dow at present, given the degree of volatility seen in recent days. The index is back below the 50-DMA, with the daily RSI steadily declining too, an indication that buying pressure has yet to arrive in any significant form.

Continued weakness targets the early January low around 17,400, with the 100-DMA below that at 17,330. Crucially, the index is, for the moment, below the uptrend line that runs from the October low, so ideally the bulls need to engineer a move back above 17,600 and then target the 50-DMA at 17,730.

On the hourly chart the price is below the 50-hour and 200-hour MAs, with the former moving average crossing below the latter once again. Further selling would take us back towards 17,300, particularly if earnings season fails to live up to expectations.  

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