Technical analysis of key indices (Wall Street, UK 100, Germany 30)
James Chen December 3, 2014 6:00 PM
<p>Wall Street Most of the major global equity indices have spent the past month-and-a-half -, since mid-October -, recovering strongly from the deep, month-long pullback […]</p>
For some of these indices, that pullback could be classified as a correction, which is generally perceived as a pullback of 10% or more.
For the Wall Street index (which tracks the Dow Jones Industrial Average), however, the pullback was less threatening – at a relatively mild 8% from the prior all-time high around 17,360 on 19th September down to the eight-month low around 15,850 on 15th October.
Although this decline fell short of fulfilling the 10% or more correction that many analysts were expecting, it was the largest percentage pullback since late 2012.
By early October, the index had plunged below both the 50-day and 200-day moving averages, as well as a key one-year uptrend line extending back to October 2013.
After hitting the noted eight-month low around 15,850 on 15th October, the Wall Street index turned around abruptly and rebounded, quickly recovering all of its previous losses. By the end of October, the index had exceeded the noted 17,360-area high.
The month of November has continued to be exceptionally bullish. After breaking its previous 17,360 high, Wall Street spent the majority of November hitting successively higher highs towards its original upside target at the 18,000 psychological resistance level. Nearing the end of November, the index has closely approached this price objective.
Although the long-term bullish trend continues to remain strongly intact, the Wall Street index is significantly over-extended. While higher record highs may wellcould be reached during December and into 2015, the index is well past overdue for a substantial pullback within the context of the sharp, one-directional rally that has been in place since mid-October.
Any potential pullback should have an initial downside support target around the noted 17,360 area, the previous resistance level that has now become support. Further to the downside, in the event of a deeper pullback, is the key 17,150 support level, also a major previous resistance area.
The UK 100 index, which reflects the FTSE 100 index in the UK, suffered a particularly damaging plunge beginning in early September from major resistance around 6900.
From almost a 15-year high of 6905 on 4th September to a 15-month low of 6070 on 16th October, the index fell by 835 points in the span of six weeks. This represented a full 12% correction, significantly more than the declines during the same period that were experienced by its US counterparts.
In the process of that correction, the UK 100 plunged below both its 50-day and 200-day moving averages, as well as several very significant support levels. These levels included 6500, 6400, and 6200.
The plummet finally subsided in mid-October at the noted 15-month low of 6070, which was also around the 38% Fibonacci retracement of the long-term bullish trend from 2011.
After hitting that low, the index rebounded sharply and went on to recover a major portion of its previous losses. Like most of the other major global indices, the UK 100 spent most of November in an extremely sharp rally.
For the UK index, this rally has approached the 6800 level, and is once again targeting the noted major resistance around 6900.
In the event that 6900 is breached, the next major upside target resides around the 7000 psychological resistance area.
Like its global index counterparts, however, the UK 100 rally since mid-October has become over-extended and overbought. Any pullback that corrects this over-extension could target major downside support levels around 6500 and then 6400.
The Germany 30 index, which tracks the DAX, plummeted by a staggering 15% in less than four weeks from mid-September to mid-October. This very substantial correction brought the index down from its 9892 high on 19th September to a 13-month low of 8351 on 16th October.
This plunge followed a similar decline in the month of July when the index fell sharply from its all-time high just above 10,030.
The most recent correction that began in late September prompted the Germany 30 to drop below both its 50-day and 200-day moving averages, as well as a key long-term uptrend line extending all the way back to late 2011.
Major support levels were also broken to the downside, including the 8900 level. The drop also spiked briefly below the key 8500 support level before rebounding.
In mid-October, the index began what has become a full rebound and recovery from the noted 13-month low of 8351. As of late November, the index has moved back up, far above its 50-day and 200-day moving averages, and spiked above the noted intermediate September high of 9892.
Although the global pullback of September and October was particularly damaging to the German equity index, Germany 30 has been in a continuous recovery mode for much of the latter half of November, and appears once again to be targeting record highs above 10,000.
Like the Wall Street and UK 100 indices, however, Germany 30 is approaching major resistance and severely overbought territory. The steep climb of the past several weeks has rendered the German index ripe for another pullback. In the event of this pullback, major downside support targets continue to reside around 9350 and then 8900.
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