After last week’s technical damage, and the subsequent rebound, are we going to see renewed weakness for the major indices next?
After the global stock markets managed to find support on Tuesday, we have seen further follow through for European indices and US index futures so far in today’s session. However, the key question is whether this is the start of a rally to new highs, or will investors see this an opportunity to exit or trim their long exposures considering the big drop last week? If investors were so worried last week to dump risk assets, then fundamentally nothing significant has changed in the space of the past couple of days to suggest the bulls are out of the woods. Indeed, there is increased risk we may see renewed weakness come into the markets as the major indices test old support levels, which could offer resistance now that they are being tested from underneath. More on that later.
The situation with the more contagious delta strain of the Covid-19 virus is getting worse, especially in Asia. South Korea and Thailand have reported record infections, with the Japanese capital Tokyo likely to see a surge in cases as the Olympics gets underway. Efforts across many regions to curb the virus spread has dampened high expectations about demand for things like travel and tourism etc.
The only positive spin one can put on this in so far as equities are concerned is that it will help slow QE tapering by central banks. And that could be one of the reasons why we have seen the markets rebound over the past couple of days. Another reason is the generally supportive corporate earnings that we have seen so far.
But as I mentioned above, let’s see if the major indices will be able to break higher or retreat as they test broken support levels from underneath today. Given last week’s technical damage and the mostly unchanged fundamental backdrop from last week, the bears might be ready to pounce again.
The UK index has been the weakest link in the recovery phase, and it was one of the first to breakdown. So, if you are bearish, this one is definitely the one to keep a close eye on:
The German index managed to hold its bullish trend line that has been in place since March 2020. Watch out for a potential breakdown as it could lead to follow up technical selling given how heavily this market is traded:
The major US indices have fared much better than their European counterparts, but signs of cracks are appearing to show. Will broken support at 4340 be defended by the bears today?
The US tech heavy index will remain in focus with technology earnings kicking into a higher gear. But the index has broken its short-term bullish trend line and made a lower lows below 14550 before rebounding. Was that lower low a breakdown in market structure? Time will tell.
With all the above charts showing some technical damage, the bulls need to proceed with extra care as we are now in bears’ territory again after the 1.5-day recovery. The bulls must wait for their opportunity until it becomes clear that the sellers are no longer in control of price action again.