FTSE 100, DAX 40 and S&P 500 stage dramatic U-turn

​​FTSE 100 stages dramatic recovery rally

Despite the UK government remaining under pressure and likely being forced into another u-turn with regards to its mini-budget tax cuts, and hotter-than-expected US inflation data which initially drove the FTSE 100 to levels last seen in March 2021, the index staged a dramatic bullish reversal late Thursday afternoon.

For technical analysts this came as no surprise since market sentiment had been extremely bearish over the last few weeks and days, short positions at very elevated levels and because positive divergence could be seen on the daily Relative Strength Index (RSI).

It occurs when the index makes a new price low compared to a previous low, but the indicator makes a higher low, thus not confirming the price low and more often than not leads to a bullish reversal in price.

The two-month downtrend line at 6,958 is thus in sight, a rise above which would put the early September low and the early October high at 7,104 to 7,131 back on the plate.

En route lies the minor psychological 7,000 mark. Slips should find minor support at Friday’s 6,882 intraday low and further support at the 28 to 29 September lows at 6,835 to 6,828.

DAX 40 stages a bullish reversal despite hotter-than-expected US inflation data

The DAX 40’s initial reaction to the higher-than-expected US Consumer Price Inflation (CPI) data, like that of its European and US peers, was to drop before short covering amid extremely negative market sentiment, basically meaning that the market had run out of sellers short-term, and pushed the index higher.

Perhaps some market players took the fact that US inflation decreased marginally for the third month in a row to 8.2% over the 12 months to September, even if less than had been forecast, as a positive and started buying equities despite the still gloomy overall outlook.

After-all, most market players were positioned short into the CPI data and the remainder went short after the data was released, and when the DAX 40 began to rally, some traders needed to buy back their shorts, fuelling further buying which took the index above Wednesday’s highs and later in the day to above the September-to-October downtrend line, fuelling further technical buying.

The early October high at 12,704 is expected to be overcome today or next week with the early September and 20 September highs at 12,940 to 13,057 being next in line.

Slips should find support along the breached two-month downtrend line at 12,396.

S&P 500 forms bullish reversal ahead of major US earnings

The S&P 500’s initial drop to levels last traded in November 2020, marginally below the 50% retracement of the pandemic bull market amid higher-than-expected US CPI data, was followed by a short-covering rally to above the 200-week simple moving average (SMA) at 3,600 ahead of today’s earnings by JPMorgan, Wells Fargo, Morgan Stanley and Citigroup, amongst others.

From a technical perspective the bullish reversal on the daily candlestick has further to run with the late September high at 3,737 representing the first upside target, followed by the 3,807 early October peak.

Good support can now be found between the 27 September to early October lows at 3,611 to 3,576.