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​FTSE 100, DAX 40 and S&P 500 see biggest losses in months

​Outlook on FTSE 100, DAX 40 and S&P 500 after US CPI data.

​​FTSE 100 forms bearish engulfing day

The FTSE 100 reversed its short-term uptrend in line with US and Asian markets as higher-than-expected US consumer price index (CPI) data increased fears that the Federal Reserve (Fed) will need to pursue a more aggressive tightening policy to combat inflation.

The index topped out at 7,515 on Tuesday before forming a bearish engulfing pattern on the daily candlestick chart whereby yesterday’s negative open-to-close body completely “engulfed” the previous day’s bullish body.

Since this reversal pattern comes after an Elliott wave zigzag correction, a decline to below the 7,131 early September low is likely to ensue in the course of the coming days despite the UK inflation rate unexpectedly slowing to 9.9% in August from 10.1% in July, which was the highest reading since 1982. It is the first time in 11 months that inflation dropped, amid a big slowdown in the cost of motor fuel prices. Having said that, core prices continued to climb to 6.3% year-on-year versus 6.2% previously.

Minor support may be found along the breached one-month resistance line, now because of inverse polarity support line, at 7,252 while resistance is seen along the 200-day simple moving average (SMA) at 7,402.

DAX's September rally ends abruptly

The DAX 40’s recovery from last week’s 12,688 low ended abruptly at Tuesday’s 13,570 high as the US Bureau of Labor Statistics reported that US CPI rose by 0.1% in August and by 8.3% from last year versus an expected 0.1% fall and 8.1% rise respectively.

The higher reading stoked fears that the Fed will not only raise rates by 75- and perhaps even 100 basis points (bps) at next week’s meeting but also continue to pursue an aggressive monetary tightening policy to reign in soaring inflation.

The index formed a bearish reversal candle and is now trading below its 55-day SMA whilst revisiting the 13,057 early September high with an eventual slide to below its early September low at 12,596 looking probable.

Above the 55-day SMA at 13,178 resistance can be found between the early August low and late August high at 13,334 to 13,376. Further resistance comes in at the 20 July high at 13,376.

S&P 500 logs biggest one-day drop in two years as US CPI remains elevated

The S&P 500 brutally ended its four-day rally at 4,155 before selling off by 4.32% in regular trading as US consumer price inflation came in higher than expected.

This made investors fret about the prospect of an even more aggressive response from the Fed and provoked the biggest one-day drop in over two years as the index wiped out the previous three days’ gains within one day.

Key support at the early September low at 3,884 is thus back in sight, a fall through which would have medium-term bearish implications and would put the June and July lows at 3,720 to 3,636 back on the map.

Resistance can be seen along the 55-day SMA at 4,022.

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