There seems to have been an improvement in sentiment on equities in the past 24 hours or so. As bond yields and the US dollar have dropped back, risk appetite has improved and this has led to equity markets picking up. The rebounds are set up to now test some key technical barriers. If these barriers can be broken, then it would signal a decisive shift that could be sustainable. It looks to be a crucial inflection point for indices.
- Indices have not reacted negatively to the rising US inflation or the FOMC minutes. How they continue to react will be key to breaking the corrective moves
- Technicals show major indices rallying into crucial barriers of resistance. This is a key moment for the medium-term outlook
Indices have shown resilience
US inflation surprised to the upside yesterday, but indices still managed to pull higher. This was helped by bond yields pulling lower across the session, with the US dollar also weakening. Traditionally, both of these have negative correlations with equities (lower yields and lower US dollar tends to be positive for equities). There are signs that the dollar may now be at least in a near-term correction following a period of strength.
These moves continued in the wake of the FOMC minutes. The minutes showed that the FOMC is ready to taper asset purchases. This may begin either in mid-November or mid-December, but the taper will be relatively gradual, with a reduction of $15bn per month to the asset purchases which are currently $120bn per month. This leaves an 8-month taper on the cards. The reaction on indices seems to suggest the market is comfortable with this.
Perhaps the key is that the minutes remove some of the uncertainty, something which traders hate. The positive response is certainly encouraging. However, as the technicals show, these markets are now at key inflection points. A crucial test of recovery potential is here.
Wall Street rallying to test key barriers
Technically, the S&P 500 futures (MT5 code: SP500ft) are at a crucial level within the medium-term trading range. The rebound in the past couple of days is now hitting three key barriers. Firstly, the rebound is set to test the six-week downtrend (falling today at 4395). There is also the resistance of the mid-range trading band at 4385/4420. Furthermore, on momentum, the 50 mid-point level on the RSI has been a key bull failure point throughout the past 5 weeks.
The bulls will be looking for a closing break above the downtrend, whilst a move above 4420 would confirm the improving outlook. However, if there is another failure around here, given the importance of the resistance of these indicators, it could see a quick spiral back down towards 4225/4295.
The improvement is also being seen in the Dow futures (MT5 code: DJ30ft), with similar technical barriers. Once more we see the mid-range band ready to be tested between 34,500/34,850. The RSI has also been struggling to get above 50 for the past six weeks too. The bulls will need to break free above 34,850 to see traction in a more positive outlook. A bull failure around here will see the Dow confined to chopping around the bottom regions of the medium-term trading range once more.
We also see the NASDAQ 100 futures (MT5 code: NAS100ft) picking up on a near term basis. However, there are key technical resistance levels to tackle now. The overhead supply from the old floor around 14,800/15,000 is a crucial barrier to overcome. A move above 50 on RSI would signal growing intent, whilst a five-week downtrend is slightly higher at 15,075 today. However, the bulls will be encouraged by holding on to the support of the primary uptrend channel (in place since June 2020). If a move above 15,000 can be sustained this would be a key signal of improving outlook.
European indices are also improving
Across the pond, there are also signs of hope for equity bulls. The German DAX (MT5 code: GER30) has made a decisive move above resistance at 15,265 to complete a small base pattern. This now implies recovery towards 15,700 near term. However, the bulls will also be looking at the RSI and if there can be a sustained move above 50, it would suggest there has been a decisive shift in sentiment. The mid-range trading band resistance 15,450/15,550 is a barrier that needs to be overcome too.
For anyone who has been following the performance of major indices over recent years, to see FTSE 100 (MT5 code: UK100) as technically the strongest outlook, will be strange. FTSE 100 has been the perennial underperformer of the major indices. However, its lack of growth stocks has relatively insulated it in recent weeks. Incredibly, the index is now eyeing a test of the key medium-term range highs. This will be a crucial test for FTSE 100.
An intraday move to a two month high has already been seen today, whilst RSI momentum is strengthening into a bullish configuration, with upside potential too. The market is in a strong position to test the key resistance between 7200/7240. Bulls will be looking for a closing break above 7240 to open the upside once more. Certainly if Wall Street can break through its barriers, then FTSE could be in a strong position to break the shackles of a 420 tick consolidation range.