Taken at face value, the rebound in global equity markets looks impressive. Up 2.5% on the DAX, 2.4% on the FTSE 100 and 2.9% on the CAC 40. However there has been little, if any, catalyst behind the move and there is a concern that once again the recovery could just peter out and the bears return once more. Volatility remains high and looking at the hourly charts of the European equity markets there is some key near term resistance approaching which need to be breached before the bulls can even think about this being a sustainable move.
Equity markets remain extremely volatile, with the options volatility indices pushing higher once more reflecting the pick up in demand for options strategies (i.e. buying puts) that can help to guard against long portfolio positions. Whilst the measures of market volatility for the DAX and FTSE 100 have dipped back today they still remain elevated.
The average of the FTSE 100 volatility over the past 6 years has been around 17, but even though there has been an 8% decline today alone, the volatility index still remains a lofty 25, which is around 47% above the average. This is a similar position to the DAX which averages 21.5 over the past 6 years on its volatility index, but again despite a 7.4% decline today the current level is still 29.9 which is 39% above the average. (Aside: the volatility in these markets in September has resulted in the FTSE 100 having an average daily range of 125 points which is way above its 2015 average of 88 points, a volatility that looks set to continue for a while yet.)
But what of the markets themselves? What needs to be done to improve the outlook for the European markets? The hourly charts paint a very clear picture of lower highs over the past few weeks. There is now some key near term resistance which needs to be breached in order to improve the outlook.
The FTSE 100 broken below 6020 last week which opened a test of the low at 5768 again. The rebound to 6116 which failed on Friday has now left a key 100 pip band of resistance. Interestingly today’s rally has already unwound into that resistance band, but also the hourly RSI is back to a level where the sellers have returned throughout the past few weeks. If the momentum starts to tail off (and it is already looking like it could) then it could be a chance to sell.
The DAX Xetra has been extremely badly hit by exposure to China and also now the Volkswagen scandal. Technically though the recovery is going to test the initial resistance at 9745, which could complete a small base pattern which would imply 10,165. However there is big near term resistance now at 10,000 and unless there was a rally through 10,335 then the bears will still be in control. Look at the hourly RSI again, with the consistent failure around 60 in the past few weeks. With the resistance at 9745 yet to be breached the bulls are already in their first test. There is much more that needs to be done to suggest a sustainable improvement.
The resistance on the French CAC 40 is more pronounced than the other markets. There is a significant pivot level now in place at 4500. This is a level that was tested on 4 separate occasions before being broken on 22nd September. The recent rally found resistance almost bang on this old support. The rally today is now within striking distance, and a move above it would be seen as a significantly positive near term signal. Once again the hourly RSI is bearishly configured and is up at 60, and again this is a level at which the bulls have struggled to maintain their momentum.
All in all this still looks to be a dead cat bounce on all of these markets. It will become clear in the next day or so if these bounces can turn into something more sustainable. It is all set up intriugingly for the crucial PMIs tomorrow and Non-farm Payrolls on Friday.