In yesterday’s news, major US banks cleared Federal Reserve stress tests. JPMorgan Chase and Goldman Sachs banks rose strongly after the Fed’s stress-test review gave the green light for dividend increases and share repurchases. This helped alleviate selling pressure in US Markets with stocks snapping a two day losing streak, causing the S&P 500 to move higher. The DAX also rallied in tandem with the S&P 500.
However, the Dollar Index retraced some of its gains after earlier hitting a 12-year high versus the euro, pressured by a third-straight decline in monthly U.S. retail sales. This fuelled the Euro to rally against the dollar, ultimately putting downward pressure on the DAX. A stronger Euro equals a weaker DAX and vice versa, seldom do the two correlate.
The result of this ‘mixed bag’ of news caused the DAX to bounce around in trading yesterday. What seemed like a big sell off at the start of the London session, with price retracing from its previous days highs at 11850 to lows of 11750, the market stayed somewhat range-bound.
Looking at the Hourly chart below, one can see the DAX has failed on eight occasions to close & move above the key psychological area of 11850. However, it has also met firm support at the 11776 level, failing to also close & move below this level, equally on eight occasions so far.
(click to enlarge)
CONCLUSION – NEUTRAL
Although a break of the 11776 level intraday should indicate more selling pressure to come, there is strong support below. Looking at the chart above, strong support lies at the 100 moving average (blue line), 11600 and 200 MA (green line). So any shorting from these lower levels (11770), should be executed with tight stops and limited expectations for profit targets. Buying the dip with tight stops would be a more sensible approach.
Remember – stocks on Wall Street posted their biggest gains since early February yesterday. The combination of last Friday’s positive U.S. jobs numbers and the launch of QE in Europe this week has cemented the picture of monetary policy divergence. So selling caution is paramount ahead of next week’s US Federal Reserve meeting. On the one hand, steady job growth has many expecting the Fed to lay the groundwork for an eventual rate hike. But the sharp rise in the dollar over recent months, could warrant a warning from the Fed as a potential threat to growth.
The market will be clearer next week after the Fed meeting.
Bearish targets :-
- 11706 (extension to daily range [avg. last 22 days is 152] , also close to Daily S2 Pivot 11711)
- 11685 (50% retracement of Wednesday’s move higher)
- 11600
Bullish targets :-
- 11850
- 11893 (extension of daily range)
- 11927 (Daily R2 Pivot)