A recovery in risk appetite has taken off significantly in the past week. The move has been driven by a sharp rebound on Wall Street, and most specifically the high growth NASDAQ and the S&P 500.
- Wall Street indices have engaged in sharp recoveries relative to other major markets. This is indicative of established risk recoveries.
- Technicals show key breakout levels are now a gauge of key support for the risk rally to remain on track.
The turnaround for Wall Street
Last week we first highlighted the improving technical signals on indices. However, we said that Wall Street needed to give its backing to the recovery to make the move sustainable. It is rare for any rally to last long without Wall Street indices also moving strongly higher.
The performance of major US and European markets in the past month shows how major US markets have been swinging around. A month ago, Wall Street was performing well, but then proceeded to deteriorate into being the worst performing of major markets. This lasted until just over a week ago, but since then we have been seeing a big turnaround again, with the S&P 500 futures and especially NASDAQ 100 futures accelerating higher. The DAX has been a strong performer for over three weeks, but the improvement in the prospects of Wall Street is strong signal for the sustainability of the broader market recovery, as Wall Street tends to lead the way in broader equity market rallies.
Equally, it is interesting to see that once more, as risk recovers, we see FTSE 100 beginning to lag again. The primary UK index is seen as more defensive than the likes of the German DAX or S&P 500 (the latter due to its big tech weighting). Therefore during times of risk recovery, the FTSE 100 will trail behind. We can see this in the chart below.
The Wall Street rally has room to run
Recoveries on Wall Street (especially the S&P 500) are consistent with a decline in volatility across Wall Street. The VIX Index of S&P 500 options volatility is unwinding from its recent highs of over 30.
Throughout 2022, the rallies on Wall Street have been sustained until the volatility levels of the VIX have unwound to below 20. The VIX has tended to settle down around 15/20 in the recovery phases. Volatility is currently around 26 and this means there is still plenty of room for a further reduction in volatility, and therefore further room to run in the Wall Street rally.
Technicals show key breakouts on Wall Street
On a technical basis, there has also been a decisive improvement amidst the recovery of the past week. There have been key breakouts on Wall Street. These now become key areas of support.
This is shown on the S&P 500 futures (SP500ft) rallying above 4100/4140 has now opened a recovery towards 4300. If the bulls can now start to build higher lows around 4100/4140 it would be a strong indication that a two-month downtrend and 4300 can be challenged. Already this 4100 support has held up well during a test yesterday. If this can continue then the improving outlook will be sustained.
The Dow futures (DJ30ft) have rallied through resistance at 32,165/32,800 in a move that has opened a test of the next key resistance band 33,900/34,200. However, the formation of a higher low around (or above) 32,165/32,800 would add strength to the technical position of the recovery. It means that yesterday’s reaction low at 32,720 already takes on added importance. The bulls holding this as a basis of support adds conviction to the recovery.
However, on a technical basis, there is still more work needed for the NASDAQ to recover decisively. The rally of the past week on NASDAQ 100 futures (NAS100ft) is into the key resistance of overhead supply between 12,550/12,940. However, this move has also formed a base pattern (double bottom) that completed above 12,600 (implies c. 13,700). The market is seeing a pullback to this neckline support now around 12,550/12,600. If the underlying support of the neckline can hold, whilst also sustaining the recovery uptrend, then the recovery can continue. A break above 12,940 resistance would open the next phase of the recovery.
German DAX recovery is also progressing well
Elsewhere we have also seen a strong technical recovery in the German DAX (GER40). A move clear of the resistance between 14,220/14,320 has completed a small base pattern which implies c. +1000 ticks towards 15,320. The move has also broken a 4-month downtrend and is now decisively above the now rising moving averages over the near (21 day) to medium term (55 day) outlook.
The market has just eased back slightly in the past couple of days, but this looks to be a pullback towards the breakout and technically looks to be a chance to buy. The base pattern opens the recovery towards the resistance at 14,800/15,000. Thi is a crucial medium to longer term barrier for the DAX and will be the key determinant of how sustainable recovery can be in the coming days/weeks.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
