Indices hold key support ahead of plethora of central bank meetings

European, US and Japanese stock indices, which have all taken a beating since the start of the year, are trying to extend last week’s recovery rally ahead of central bank meetings in the US, UK, and Japan this week.

Sentiment remains cautiously optimistic despite ongoing shelling of Ukrainian cities as top negotiators from Russia and Ukraine hold renewed talks on Monday. Both sides had cited progress in the lead-up to the meeting, according to the BBC and Reuters.

What has Wednesday’s FOMC in store?

The US Federal Reserve is expected to kick off its first rate hike cycle since July 2019, when it raised rates from 2% to 2.25%, by effectively doubling its fed funds rate by 25 basis points to 0.5% after its two-day Federal Open Market Committee (FOMC) meeting on Wednesday.

In the US, the Nasdaq 100 is still trying to stabilise above its recent lows at 13,106 to 13,033, despite some big US technology stocks such as Apple Inc. declining in pre-market trading.

While Friday’s 13,862 high isn’t exceeded, downside pressure should prevail. Failure at the 13,033 February low would lead to the May 2021 low at 12,923 and the 38.2% Fibonacci retracement of the 2020 to 2022 advance at 12,880 being eyed.

Further down the August 2020 high and the March 2021 low can be seen at 12,466 to 12,212. Were Friday’s high at 13,862 to be bettered, however, the 2022 downtrend line at 14,030 would be targeted and is expected to give way for the early March high at 14,395. This level would need to be exceeded for a bullish picture to emerge with the 15,131 to 15,165 resistance zone then being targeted. It consists of the 200-day simple moving average (SMA) and a confluence of daily highs and lows seen since mid-January and should act as strong resistance.

Similar technical levels to watch out for on the S&P 500 are the 4,102 February low and Friday’s high at 4,335, a rise above which is needed for the 2022 downtrend line and the early March high at 4,400 to 4,418 to be reached. Only if this resistance area were to be overcome, would the bulls probably be out of the woods.

A drop through the recent 4,102 low would have longer term bearish implications, however, with the 4,030 May 2021 low and the psychological 4,000 mark being targeted.

Will the BoE hike rates to pre-Covid levels?

Wednesday’s FOMC will be followed by the Bank of England (BoE) meeting on Thursday for which a third rate hike in a row is anticipated to take the base rate to its pre-Covid level of 0.75%.

Just like its US counterpart, the central bank faces a dilemma amid surging inflation and a weak outlook for economic growth.

The FTSE 100, which followed last Monday’s Doji on the daily candlestick chart by a 4% rise last week, so far remains below the 200-day SMA and Friday’s Doji high at 7,231 to 7,264.

This area will need to be exceeded for stronger resistance between the 55-day SMA, two-month resistance line and 25 February high at 7,441 to 7,564 to be reached.

The 7,564 high would need to be bettered for a resumption of the long-term bull market to take shape, something which does not look probable at the moment since the current high inflation does not seem to be transitory.

A drop through Friday’s low at 7,503 would put the minor psychological 7,000 mark back on the cards with the next lower current March low at 6,764 representing key support.

Failure at 6,764 would have clear longer-term bearish implications since support, which has held since April 2021, would be slipped through, meaning that an additional 7% to 10% decline may be in store, taking the contract back to the November 2016 and December 2018 lows and June 2020 high at 6,534 to 6,519.

What about Japan?

Unlike its US and European counterparts, the Bank of Japan (BoJ), which meets on Thursday and Friday, is expected to maintain its dovish stance. This includes keeping to its -0.1% target for short-term rates and a desired trading range of 0% for the 10-year yield.

The Nikkei 225, which has dropped by around 15% from its early January high, displays a similar technical picture to the above-mentioned indices with last week’s low at 24,503 representing key support and the 2022 downtrend line at 26,560 resistance.

A fall through last week’s low at 24,503 would most likely lead to a retest of the pre-pandemic highs at 24,137 and could extend to the June-to-October highs at 23,724 to 23,307.