Levels to watch: FTSE, DAX and Dow

European indices are threatening a more substantial correction.

A chart
Source: Bloomberg

FTSE resistance dominates as selloff looks likely

The resistance zone derived by the ascending trendline dating back to November 2014 and the March peak of 7065 has been crucial to price action over recent days. Yesterday’s sharp selloff from the trendline promptly brought the price crashing back down to the 7065 support level which held up, for now.

Yesterday’s daily candle formed a spinning top, signaling indecision in markets. This is palpable given the scenario we find the index within. A close back below 7065 and 7026 would be big signals that we are set for a period of downside, which would be consistent with previous price trends in the FTSE. The majority of the new all-time highs that have been created were typically short-lived and preceded a sizeable correction. I could see this happening again and should we see the price move below 7065 and particularly 7026, alarm bells would be ringing for a period of downside to come. Ultimately direction will be determined by the resolution of the current triangle resistance zone we find ourselves in.

DAX selloff met by bounce at key moving average

This week’s selloff represents the longest period of continuous downside seen in the German index since July 2014, with yesterday providing the strongest selling pressure of the week so far. However, attempts to push lower seem to have been met by significant support around 11,910, which represents the meeting point of an ascending trendline dating back to 13 March, alongside the 200 period simple moving average (SMA) on the four-hour chart.

This morning’s bounce has brought us back to the 12,000 resistance point which was respected closely within the consolidation seen overnight.

Given the size of the recent pullback, I could see a bigger move higher should the price manage to move above 12,000 on an intraday basis. Especially if new support is exhibited at that level. However, with the size of the recent downturn, coupled with a FTSE 100 that looks like it could turn downwards, I am hesitant until price either moves above 12,000 or below 11,900. Thus I would expect a bounce to around 12,100 should we move above 12,000 on an intraday basis. Yet a move back below 11,900 would mean the next major support level of 11,800 is targeted.

Given the long-term trend, I expect bulls to come back in soon and thus we are looking for reversal signs for a return to a more concrete bullish outlook.

Dow Jones continues to move higher yet gains slow

The Dow has managed to establish a clear uptrend throughout the past week, with higher highs and higher lows continuing to form. However, warning signs are beginning to emerge with the highs gaining less than previously. The difference between previously established highs were 124.5 points and 52.5 points respectively. However, with yesterday’s new April high only gaining 10.5 points, there is a risk that the Dow is beginning to slow down.

That being said, I continue to favour a bullish outlook, with support expected to hold around 18,075 given that this represents the convergence of the 20-period SMA on four-hour chart and ascending trendline dating back to 3 March.

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