Levels to watch: FTSE, DAX and Dow

A fifteen-year high in Japan overnight and a strong recovery in US indices last night seems to point to an abatement of the 'tightening tantrum' that beset markets earlier in the week.

A chart
Source: Bloomberg

In Asia the story is of more monetary easing, both in China and Japan, while the prospect of wage rises in the latter country bolsters the hope that consumer spending will be on the rise.

US markets have moved back into positive territory for the year, as some bad news in the form of weaker American economic data which took the shine off the recent jobs report and suggested that the Federal Reserve might yet leave its statement unchanged during its meeting this week.

For markets to fixate on a single world, 'patience', is rather ridiculous, but it is an indication of how loose monetary policy has become the norm. Any hint of a return to some kind of normality is enough to provoke a sell-off, but even when the Fed does raise rates it is likely to do it slowly and gradually, allowing markets to adjust as they go.

FTSE looks to rebound

The key to today's price action will be the 50-day moving average. A close above here, coupled with a rise in the relative strength index and stochastics would signal that the latest pullback could be over. In that case, we look towards the 20-DMA at 6880 and then on to the all-time highs around 6960. It is important not to call a victory for bulls just yet, but, caught between European markets that do not seem to want to go down and US markets that have found support and are rallying, the FTSE 100 could find itself dragged higher and on to the 7000 level. A heavily oversold reading on the four-hour chart combined with support at 6700 shows that there remains a clear appetite to buy into the market, especially from those who may have missed the spike to new all-time highs.

For the time being we look towards yesterday's peak at 6800 as resistance, while the 100-hour MA is also acting to cap gains. A short-term hourly trendline is in place from Wednesday's lows, which could help to provide a foundation for firmer gains. Any dip through yesterday's lows below 6700 will mean that the potentially optimistic scenario outlined above has been cancelled, with support next found at the 200-DMA and then 6620.

DAX chugs onwards

It seems like just a matter of time before the 12,000 level is reached here, as QE works its magic and drives the index higher. At some point a selloff will materialise, but it does not appear as if that time has arrived yet. Instead dips will continue to be bought, with ideally a move back to the 20-DMA at 11,340 affording an opportunity for those of us that missed this rally to hop on board. Overbought readings for the RSI and stochastics in the daily timeframe continue to be ignored, so we look towards shorter-term time periods for entry points.

Ideally a drop back to the rising February trendline on the hourly chart will materialise, taking us back as far as 11,600, but this requires patience. Should such a move not arrive in coming days, then 11,700 or the 100-hour MA at 11,670 could be entry points. The hourly RSI is edging lower for the time being, but with options expiry week and its traditional strong performance looming, we may not even get that brief chance.

Dow moves higher on the year

Yesterday's bounce off the rising October trendline was a classic piece of stock market action and puts the index back in positive territory for the year, if only just. With stochastics and the RSI rallying in the daily timeframe, it now looks as if the index has the ability to move  back above 18,000 and attempt to break through recent highs above 18,200. The rising ceiling of resistance enters the fray at 18,400, so this is the next area to watch for.

A bullish crossover on the stochastic momentum index is perhaps the best signal that the dip may be over. A close back below the October trendline will reverse yesterday's positive developments, with support likely at the 200-DMA around 17,300.

On the hourly chart the index is drifting back from overbought levels, but a rising 50-hour MA should provide the support needed on what is likely to be a fairly quiet trading day. Monday's peak around 18,030 is the next target on the upside, which would also carry us through the 200-hour MA.

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