Where to next for the FTSE 100, DAX 40 and Dow Jones Industrial Average?

​Minor equity market recovery seen despite global recession fears

As US markets opened up again after Independence Day on Monday, European and US equity markets swiftly sold off on global recession fears, driven by soaring inflation, reduced productivity and all G7 central banks, except the Bank of Japan (BoJ), expected to pursue their aggressive monetary policies.

Despite the publication of the latest US Federal Open Market Committee (FOMC) minutes on Wednesday showing that another 50- or 75 basis point (bps) US Federal Reserve (Fed) rate hike in July is in the pipeline, the resignation of the UK prime minister, Boris Johnson as Conservative party leader and much weaker than expected industrial production in Germany, equity markets are staging another minor bounce.

German industrial production only increased by 0.2% month-on-month in May compared to an expected 0.4% and an upwardly revised 1.3% in April, as the ongoing shortage of primary products and supply chain constraints caused by the war in Ukraine and lockdowns in China weigh on production.

The fact that several key ministers in the UK, such as the Chancellor of the Exchequer, Rishi Sunak, have resigned from Johnson’s cabinet before he was also forced to step down as party chairman on Thursday, had little impact on the FTSE 100. The index continues its recovery rally for now despite Mr Johnson saying that he will serve “until a new leader is in place” with a caretaker government being in charge until a new party leader and prime minister is appointed.

Meanwhile all eyes are on Friday’s US non-farm payroll (NFP) data which is likely to determine at least the next few days’ trends in equity indices and futures. This comes at a time when a recent Bloomberg Economics forecast said the odds of a US recession in the next year stands at 38% and investor sentiment remains at consistently low levels. On the other hand, there are signs that the inflationary bubble may well deflate later in the year as commodity prices continue to slide, with wheat prices for example trading back at pre-Ukraine invasion levels, the question is what conclusion should be drawn on where equity markets are headed in the second half of the year ahead of earnings season.

The technical outlook may have clues as to the ensuing trend in equity indices

While macro-economics and geo-politics determine the long-term business cycle, technical analysis, by its virtue drills down on price and volume analysis and does not focus on the “why” markets move and may thus shed a clearer light on the shorter-term timeframes.

With this in mind let’s analyse the FTSE 100, DAX 40, S&P 500 and Dow Jones Industrial Average from a technical perspective.

FTSE 100’s bounce continues despite UK prime minister’s resignation

The FTSE 100 opened higher on the back of stronger US and then Asian markets on Thursday and targets its two-month resistance line at 7,252 and this week’s high at 7,289.

However, it will only confirm a medium-term bullish reversal once a rise and daily chart close above the late June high and the 200-day simple moving average (SMA) at 7,362 to 7,366 has occurred. If so, the February to May highs at 7,649 to 7,688 would be back in focus.

Minor slips may find support between the 14 June low at 7,134 and the 1 July low at 7,100 but a drop through the June and this week’s low at 7,012 to 6,966 would put the March low at 6,764 back on the map.

In this scenario further downside is expected to be seen with November 2016, December 2018 lows and June 2020 high at 6,534 to 6,516 being eyed.

DAX 40 breaks one-month downtrend line

The DAX 40 continues its recovery rally from Tuesday’s low at 12,386, made marginally below its March low at 12,432, and is in the process of breaking through the two-month downtrend line at 12,727 with the 23 June low at 12,838 representing the next upside target, followed by Monday’s high at 12,965.

For a medium-term bullish reversal to gain traction, however, a rise and daily chart close above the 21 and 27 June highs at 13,383 to 13,444 would need to be seen. Only then could an extended rise back towards the late March to June highs at 14,712 to 14,927 unfold.

Minor support is seen at the 30 June low at 12,617 and more significant support at the March low at 12,432 and this week’s low at 12,386. Failure at the latter level on a daily chart closing basis would open the way for the 50% retracement of the 2020-to-2021 bull market at 12,110 to be reached.

A much deeper decline towards the October 2020 low at 11,332 would then most likely also ensue.

Dow continues to gradually advance despite June FOMC minutes pointing to further rate hikes

The Dow Jones Industrial Average’s recovery from this week’s 30,356 low is ongoing despite the publication of the latest US Federal Open Market Committee (FOMC) minutes pointing to another 50- or 75-basis point rate hike in July with the three-month downtrend line at 31,745 and the late June high at 31,885 remaining in the frame.

Only a rise above the 33,460 early June high would signal that this time round a prolonged up leg is underway with the February and March highs at 35,383 to 35,862 being targeted in this case.

Minor support can be spotted at this and last week’s lows at 30,422 to 30,356 and more significant support at the 29,649 June trough.

Failure there would most likely not only engage the pre-pandemic February 2020 high at 29,568 but also the 200-week simple moving average (SMA) at 29,402 as well as the August 2020 high at 29,198.