In the last few days, a clear pattern has emerged that resembles “choppy trading” at its best. If we were to use technical terms, we would say that volatility is gradually decreasing and highlighting a rather relaxed attitude on operator’s side. Hedging against the downside risk on the S&P500 but also on the Eurostoxx 50 is rather cheap now and this makes hedging particularly attractive.
Implementing this hedge would avoid “eating” the gains made since the beginning of the year in a downside scenario. However, you know that when the market is strong, no one ever wants to spend money on hedging. Fortunately, not everyone feels that way.
Huge hedging operations in the VIX options market took place last week. Someone is “betting” or rather hedging against a volatility spike in the summer months. The reason could be related to hiccups in vaccination campaigns, the prolongation of existing lockdown measures or the spread of a new variant. Outside of the “virus” risk, the hedge could work in a scenario where US interest rates rise above the 2% level or in cases where inflation in the US and other parts of the globe starts to run unchecked.
In the meantime, a decrease in Vix index volatility and a fall in 10-year Treasury yields has allowed a new wave of buying in equities, especially US equities. Next week won’t be characterised with particular macroeconomic events even though inflation figures in Europe and in the US will be under observation. Especially in the US, a strong increase in the consumer price index could fuel new fears on the markets.
Analysis of the week and scenarios for the DAX and Dow Jones
This last week, we witnessed new all-time highs for most indices despite the sideways phase due to low retailer presence and the start of the quarterly earnings season weighed heavily on intraday trends. The markets can still look for further gains even though its best practice to take it day by day in order to get a better idea of the weekly trend. The close on Friday the 16th of April will give us important indications.
DE30 – On Tuesday last week, the DAX opened with a gap up and new highs above 13.330 but then reversed slightly and remained in a narrow range for the rest of the week. Although the DAX held above the 15.119 support level, we did not reach the 15,464-15,665 area which is our weekly target.
Starting from Monday, if the price manages to stay above 15,269, we will continue to aim for the 15,464-15,665 area. The real objective of the DAX is to reach the 16,000-16,200 area.
The first weekly support can be identified in a wide area: 15,119-15,017-14,981. This happens because the price has created much bigger support zones where we will continue to see ups and downs. Below 15,119 we should keep in mind the possibility of quick corrections, as well as below 15,017-14,981. The target is the intermediate support 14,918 (former resistance) and then the zone created a fortnight ago 14,804-14,842. This last area is pivotal on a weekly level and to avoid a short term bearish reversal.
First weekly support levels are at 14,744 and 14,687. These zones, if lost can offer fast declines towards the key area created last week 14,600-14,545.
Further support levels are around 14,492-14,465 and then near 14,391. The weekly key level is placed in the 14,400 area. The loss of this level could lead to lasting declines.
The 14,301 area remains particularly important. A loss of this level together with 14,231 might trigger a quick fall to buy zones 14,144-14,096 and 14,003-13,974 seen last on Monday the 8th. Conversely, if zone 14,301-14,231 sees an upward turn, it could be the weekly low and offer excellent buying opportunities.
It’s very important for area 13,977-13,877 to hold as it is on a weekly level. The key monthly support remains in the 13,821 area. As long as it is not lost, risks of further declines are likely to be denied. Otherwise, the maintenance of the support will favour bullish phases for the German index.
If the price returns below 13,750 without a quick reversal, it may target 13,650 again and from there onwards an important support in the area 13,620-13,657. If surpassed, the next downward extension may be 13,373-13,289. These areas represent excellent opportunities for long re-entries provided that US indices do not show bearish excesses and that volumes are not too high. Otherwise, shorts may be the preferred trade.
If the 13,373-13,289 area is breached, there are no obstacles until the yearly supports touched in December, 13,142 and 13,020. The possibility of a strong downward acceleration increases considerably if the price goes beyond the 13,000 points area. In this case, area 12,723-12,635 is the first relevant support and we cannot exclude the reaching it in one or two trading sessions. This area is a key support zone, a clear break to the downside of 12,500 points would open the way to further falls.
Key supports remain at 12,155-12,237 and 11,766; below these levels we should expect a trend change. After the possible loss of 11,542, the first targets are in the 11,214-11,095 area. From here, it is possible to extend down to 10,766-10,480, last touched on the 15th of May 2020.
US30 – Last week the Dow Jones hit a new all-time high, a massive rotation into technology and growth stocks has not allowed blue chips to keep pace with the S&P500 Index and the NASDAQ Composite.
From an economic perspective, Dow investors largely shrugged off an unexpected jump in unemployment benefit claims from last week. That means investors didn’t seem to consider the consequences on the economic recovery, but they reacted when the news pushed Treasury yields down. Yields have fallen from their highs with the 10-year T-bond hovering around 1.6%.
In last week’s opening, the prices held above 33,314 shows the strong presence of buyers. Not only we reached 33,427, but the level acted as a weekly support and brought the prices to our realisation area 33,600-33,800.
At present, prices need to hold 33,585. The first weekly targets can be 34,015 and then an extension to 34,351. The door to 35,000 points is about to be opened.
The 33,585-33,427 area is a very strong support. Even if the price may reach it fast, it is not likely to break it to the downside at the first attempt unless the market sentiment changes significantly together with a sudden increase of the Vix.
Weekly support remains at 33,314 points. Intermediate support for buyers can be found in the 33,225-33,146 area. We need to monitor 32,956 because if this is lost, we could see bearish pressures.
Buying support levels can be 32,761-32,638 and 32,308. The strong buying zone created three weeks ago in the 32,308-32,137 area is confirmed. Only below it we could see stronger bearish pressures, with possible weekly trend changes.
The old resistance zones of last week would be the targets below 32,137-31,741-31,986 and 31,521.
These levels may be optimal for buying opportunities.
Below area 31,234-31,181, we might see new bearish pressures. However, a break to the downside of the support 30,986-30,922 might be necessary. As we indicated, this move has led to a nice V-reversal which remains very important at the weekly level.
Below 30,986-30,922, the game is played on the support level at 30,648. If that is lost, we will look for 30,476 and vital area 30,098-30,260. The loss of the latter can signal new strength in the bearish trend. If held, it could be a perfect area for new upward reversals.
The 29,618 level will continue to determine the trend of the index in the coming weeks. Below it, we could see a strong bearish movement.
We remind you that only the loss of the weekly support 28,880-29,119 could put in crisis the annual bullish trend. Below this level, we have intermediate support around 28,319-28,051. A close below 27,762-27,625 would undermine the current bullish scenario.
Area 27,019-26,650 is vital as it has been successfully tested and has led to strong bullishness. Sellers will come back strongly if the 26,110 level is broken down. The decline may extend to the main low seen on the 30th of July at 25,777. This is a potential trigger point for a new downward acceleration with three potential main lower targets at 25,399, 25,149 and 24680. Very important annual support remains at 24,309.
IMPORTANT NOTE: The laterality of the indices is putting a strain on even the most experienced traders. It is important to work well in the openings and try to find intraday points that can give a minimum return. If we cannot find an entry with high probability, it is better to stay out of the market.
Have a good trading week!
Research provided by Giancarlo Prisco
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