Last week we wrote a note looking to use weakness in indices as a chance to buy. Then as the Omicron variant of COVID markets were struck with fear and selling pressure mounted. Reassessing the outlook for indices, we still see the recent weakness as an opportunity to buy.
- Near term, volatility remains high with markets still nervous over the implications of Omicron
- Omicron driven corrections look to be perfectly healthy moves for Wall Street markets
- European markets look more tentative than Wall Street
Near term, volatility could drive further weakness
Omicron is dominating market moves at the moment. Any newsflow that means the situation will not be so bad (such as President Biden suggesting no need for further lockdowns) is acting as a positive. Any news that points to concern are driving markets lower.
Subsequently, volatility has spiked higher across equities. The VIX Index measures the volatility of S&P 500 options. Higher-priced premiums for options traders (due to higher volatility expectations) will drive the VIX higher. This tends to come with prices on indices moving lower.
However, these situations tend to be short-lived too. Markets quickly move to price in downside risks. Although there may be some further near-term volatility and we cannot rule out further drops in indices, these moves are still likely to be near-term in nature.
Wall Street still looks strong
Notably, the higher growth markets (predominantly NASDAQ and to a lesser extent S&P 500) have been decisive outperformers. This is true, not only of the rally since October but also through the corrective phase of recent weeks. The sharp decline in the oil price is a significant contributory factor behind this as the oil majors are still a key component of the Dow.
However, all three of the main Wall Street indices (S&P 500, NASDAQ, and the Dow) have been tracking higher with uptrends throughout 2021, and remain solid within these trends. We are mindful of how close the Dow is to its trendline, but for now, the outlook remains positive.
Looking at the S&P 500 futures (MT5 code: SP500ft) we have seen the initial support at 4625 breached. However, this is not the key support area. The old breakout at 4548 provides a key basis of support. The rising 55-day moving average currently sits around 4525 and has on numerous occasions throughout this year been the basis of support for corrections.
We would be looking for 4550/4590 to be a buy zone for this correction. A sustained move below 4525 would be disappointing, whilst 4475 is another historic breakout level and a breach would seriously begin to question the medium to longer-term bullish outlook. The bottom of the uptrend channel currently comes in around 4450.
The NASDAQ 100 futures (MT5 code: NAS100ft) are in a similar outlook, but arguably even stronger. The old breakout at 15,707 means that 15,700/15,900 is a strong buy zone for near-term corrections. We questioned whether the market would test this in a corrective move. There is a much greater risk that this could happen now, but we still see this as an area of opportunity.
It is with the Dow Futures (MT5 code: DJ30ft) that we see the biggest risk to the outlook. As we mentioned above, the sharp fall in the oil price is a significant drag on the Dow. If the oil continues to fall then the positive technical outlook for the Dow would come under serious question.
However, after a -5% correction from the all-time high of 36,443, the long-term uptrend rises around 34,300. The oil-driven move lower on the Dow has gone much further than we had hoped. It has also now left a key band of resistance between 35,350/35,550 to recover back above.
We see near-term downside risk from the corrective configuration on the Relative Strength Index, but we still see this as a near-term move that will shortly be contained before bullish moves can resume.
European markets looking similar to the Dow
In the relative performance chart above, we see that the Dow is tracking similar moves to the European markets.
For FTSE 100 (MT5 code: UK100) it is interesting to see a retreat to the bottom of the uptrend channel. Once more, this is likely to be an opportunity. Even if the channel is breached, there is a huge amount of support between 6790/6960. Already, a correction of -5% (as it has been on the Dow) has unwound the market back towards this area of opportunity.
Probably the one main index that we see struggling more than most, is the German DAX (MT5 code: GER30). A fall of -7.5% from its recent peak has been consistently breaking below key supports. Furthermore, we are seeing these old supports consistently becoming new resistance now.
Since breaking above 14,810 in March, the DAX has threatened the support band around 14,810/15,000 on numerous occasions. Another test of this has been seen this morning, only to find buyers. However, if there were to be a close below 14,810 it would suggest a shift in sentiment and seriously question any positive outlook for the DAX.
We have talked previously about this more recent decline being short-lived though, and false downside breaks would be a risk. Equally, the DAX tends to underperform on the way down, whilst outperforming in a recovery scenario. If markets turn around on better Omicron news, the DAX is likely to be one of the better performers.
