Having sold off sharply during the first couple of weeks of May, a risk recovery in the past few days has allowed equity markets to embark upon a decent recovery. However, this recovery has reached a make-or-break moment. With resistance being encountered, the recovery in risk assets such as indices is being questioned. If selling pressure resumes, a lurch back towards the lows may set in. This is now a test of whether selling rallies is still the strategy, or whether it can be replaced by a strategy to buy weakness.

  • Indices are holding on to their recoveries, but although the DAX leading the way higher is encouraging, it might need a resurgence of NASDAQ to suggest the rebound is sustainable
  • The reaction around key resistance levels will be key, as will the support formed on the way higher.

Indices are recovering, but for how long?

The major indices of the US and Europe have been recovering ground lost after significant selling pressure in the first couple of weeks in May. However, there is still much to do for the recovery to be sustainable.

Here we see the performances over the past month:

Indices performance

There are a few observations to make:

  1. European indices are trading around or even above their late April highs, whilst Wall Street is still struggling to reclaim its lost ground.
  2. The DAX is outperforming in the recovery (the FTSE is more defensively configured than the DAX, so this is to be expected in a recovery scenario).
  3.  NASDAQ has picked up but is still drastically underperforming on a one-month basis.

It is the performance of Wall Street which will leave market participants worried. Wall Street is not leading the recovery of major indices. This would suggest that participants might still be cautious in this recovery.

We still believe that the direction of US bond yields will be key to a sustainable recovery of equities. The S&P 500 futures continues to have a strong negative correlation (currently c. -0.79) with real US bond yields (bond yields minus inflation).

futures vs yields

This correlation had a wobble after the Ukraine war broke out, but since early April the correlation has gotten back on track in its traditional negative positioning.

However, we also believe that indices need stability in yields to maintain a risk recovery. With the Ukraine war and fear of huge inflation, bond yields have been extremely volatile. High bond market volatility translates through to nervous equity markets. Volatility has reduced slightly in the past couple of weeks but remains elevated. For recovery in indices to be sustainable, bond market volatility needs to reduce.

market volatility

Wall Street rallying to key crossroads

Looking at the technicals on major indices, we have seen recoveries into key resistance areas. How these markets react around these resistances will be key.

On S&P 500 futures (SP500ft) we see a recovery bumping up against key overhead supply around 4100/4140 (old lows from February/March/April. There will be a bunch of stale bulls that will be encountered here. Already, this morning, we see futures rolling over. Holsing on to support around 4030 will be important initially, but a break back under 3980 would be a bearish signal once more pointing to another bull failure.

S&P futures

It is a similar story with the Dow futures (DJ30ft), with a rally into the resistance band 32,160/32,820. Moving decisively through this band will suggest a key recovery is in play.


Looking at the NASDAQ 100 futures (NAS100ft), the market is still playing catch-up, underneath the key resistance band at 12,700/13,000.

NASDAQ 100 futures

It is worth noting that all of these Wall Street indices have these resistance zones around their multi-week downtrends. They are also just in bear market rallies with the RSI unwinding back towards 45/50. However, if these resistance levels can be overcome it would signal a key shift in outlook.

Could Europe lead the recovery higher?

So, it is interesting to see the technical recovery of a European market leading the way. As we discussed earlier, the DAX is outperforming right now, on a price-performance basis, but also with improving technicals too. Where Wall Street indices are still in a “bear market rally mode”, the DAX is breaking through. The question is whether it can hold the improvement.

The German DAX (GER40) has broken an important 4-month downtrend and is now decisively above the 55-day moving average (a medium-term trend indicator) for the first time since January. The RSI is also above 50 for the first time in seven weeks.


The DAX bulls will be looking to break above 14,320 which is the first lower high of the decline. There is initial support at 13,865 which is a near to medium-term pivot and could also be the basis of support now. If this can be seen then the building blocks for a sustainable recovery will be in place. 

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.