DAX may see major barrier at 3800; FTSE may find resistance at 4350 area
Published: Nov. 04 2003, 08:58 GMT
European shares were supported by a stellar Manufacturing PMI for the euro zone, which marked the second consecutive expansion and exceeded expectations for a more modest improvement. . .
- We expect European indices to follow the U.S. market's lead, but probably at a lesser pace, as the global rally actually started with the DAX and the FTSE yesterday. The FTSE100 in London gained almost 1%, while the CAC40 advances almost 2%. The DAX in Frankfurt ended the day almost 2.4% higher. The DAX reached its highest level for the year and helped the Eurotops 300 also to mark its highest close for the year. Stocks were supported by a stellar Manufacturing PMI for the euro zone, which marked the second consecutive expansion and exceeded expectations for a more modest improvement. European stocks were also supported by better-than-expected manufacturing data in the U.S., where the continuing expansion of the ISM index signaled further momentum that may well lead to a self-sustained recovery.
* Asian stocks rose earlier in the day, with the Nikkei 225 Stock Average having its biggest advance in three weeks. Canon Inc. and Samsung Electronics Co. led exporters higher after U.S. reports signaled faster growth in the world's largest economy. The Nikkei 225 Stock Average added 2.2 percent, its biggest advance in three weeks, to 10,787.37 as of 12:53 p.m. in Tokyo. South Korea's Kospi index climbed 0.8 percent to 797.91, earlier breaking 800 points for the first time in 16 months.
* U.S. stocks got November off to a bullish start Monday as investors rallied around positive earnings news, a spate of acquisitions and signs of strength in the manufacturing and technology sectors. The Dow Jones Industrial Average closed up 57.34 points, or 0.6 percent, at 9,858.46, while the Nasdaq Composite rose 35.49 points, or 1.8 percent, to finish at 1,967.70. The Standard & Poor's 500 Index pushed 0.8 percent higher to 1,059.02, and the Russell 2000 Index of small-cap stocks advanced 1.8 percent to 537.84.
News Highlights:
* The October PMI for the United Kingdom rose to 54.2, recording the fastest expansion since December 1999. Upbeat retail sales data further underpinned the case for an imminent hike in interest rates by the Bank of England at the upcoming meeting of the bank’s Monetary Policy Committee. Indeed, with fears that the consumer economy may be overheating, an interest rate increase looks increasingly like a foregone conclusion in the U.K.
* Climbing global chip sales point to an accelerating IT rebound. Yesterday's release from the Semiconductor Industry Association provides further evidence that the IT industry is experiencing an accelerating rebound. Global semiconductor sales are shaping up to experience their strongest year on record, barring the peak year of 2000. Sales are being driven by strong consumer electronics spending, including PC buying, and accelerating business investment in IT equipment and software. According to the third quarter GDP release, growth in nominal U.S. business investment in IT equipment and software has accelerated for five consecutive quarters, hitting 9% in the third quarter on a year-over-year basis. Business IT spending is now only a few percentage points off its peak, reached in the third quarter of 2000.
* On commodity markets, industrial metals recorded strong gains with copper trading close to a new six-year high reached earlier and nickel recording its highest level in 14 years. Crude oil showed modest gains in early trading. Benchmark Brent for January traded in a tight range above $27 per barrel.
Equity Technicals:
- SPX - Friday's intraday triangle pattern did provide a boost to the index, and we did see a rally to 1061 -- stilll short of the 1065 - 1070 ideal but should eventually get there. We also want to point out that the price action from the August 960 trough has so far been descriptive of an +ascending wedge+, a scenario which would gain more traction if 1065 - 1070 hypothetical resistance holds, and forces a correction back to 1040 - 1035 area over the next few days. The significance of an +ascending wedge+ as this juncture is enormous from a strategic angle. Why? The pattern tells us that indeed the stock market may still make some gains, but that the extreme bullish sentiment in the past few months may be coming to a boil and would be followed by some cathartic action to the downside. On the other hand, there is of course the possibility that the artifact that is thought to be an +ascending wedge+ will turn out to be nothing but the pattern of a transitory bullish state, and the market would go on to destroy the illusion in the next few days. The second happenstance may be the right way to go if the index pushes through 1075 during the rest of the week. The first scenario -- our favored view -- may yet happen if 1060 - 1070 resistance holds over the next few days, and would eventually resolve into a decline to 1040 - 1035 area by early next week. We would then prepare for further ascent into 1075 - 1080 territory thereafter, but would be expecting trouble and would slowly disengage from long stock positions. This is the mind-set that we would have for the rest of the week -- but that would instantly change if the SPX were to push through 1075 over the next day or so. A switch in view is not reallty as difficult as it sounds, because we would be keeping a long stance from here, at Monday's close. A possible correction to 1040 - 1035 would announce itself with a fall below 1050, so there's plenty of opportunity to put trailing stops in place. The essential thing is to remember that when everything in the stock market seems to point to the moon as the next objective, then it is probably time for you to make an exit because the market ain't getting there, and may focusing at 960 instead.
- Dow - The blue chips also show the same +ascending wedge phenomenon+, although the pattern is not as disctinct as that of the SPX. The practical resistance is the 10,000 level, not only from technical basis but from psychological as well. The way to go from here should be according to the way describe above at the SPX analysis, and if 10,000 does provide resistance, we should see a pullback to 9700 area thereafter. The wedge scenario is effectively nullified by any strong push through 10,000 in the next couple of days. So keep the long stance, protection needed on the downside only if the Dow falls below 9800 anytime this week. Even then, there would be another opportunity to test 10,000 again, after a 9700 fall. But further out, cultivate the view that 9000 would be the next major downside objective.
- NDX 100 did rally back to 1445 area from 1410 support. We may yet see further upmove to 1460 area But look for some resistance at those higher levels -- we may see it back to 1410 - 1400 support levels thereafter.
- DAX advanced further late yesterday, building on gains made earlier. The index has been on a tear has has gone up in eight straight sessions -- we now expect a major barrier at 3800 given the overbought condition. The outlook is not as distinct as can be derived from the U.S. market, but we are now approaching the 3800 level where the first wave from the 30th September 3202 low will equal the third wave from the 23 October 3420 trough. There is sometime a strong tendency for resistance to develop at the equality level -- the tops of +irregular corrections+ develop that way, and the current situation in the DAX certainly is a candidate for such an +irregular pattern+ happening. Long positions will have a lot of elbow room to operate in, as the downside tripwire is located at 3640. We recommend in fact to look for the U.S. market for guidance -- the risk parameters are much tighter in the U.S. and would likely lead the global bourses in any downturn. The next downside target for DAX would be the 3200 area.
- FTSE makes up for the huge losses incurre dlast week, and may rise further towards the 4350 - 4370 resistance band. The spectre of higher base rates in the U.K. are not only imagined -- they are real, and would therefore limit further advance. The outlook in fact for the FTSE 100 is such that any further uptick would be considered part of +testing the top+ -- a confirmation process. If no new highs are made -- indeed we do not expect the FTSE to go higher than the 4338 high anytime soon -- then the confirmation process ends, and will be followed by more extensive declines to 3960 area.
S&P 500 Index
SP500.I (1059.02 @ 22:02 GMT)
The Dec. SPX rally did go to as high as 1060.50 but failed thereafter -- may now be heading for a 1042 - 1038 decline for the rest of the week.
Long position (from 1030.50) was closed at 1060.24 profit-stop.
Stand aside.
Dow Jones Industrial Average
DJI.I (9858.46 @ 21:30 GMT)
The Dec futures rally did hit 9860 targets and sold off thereafter. Expect the rest of the week to see the Dow head for the area of 9710 - 9700.
Long position (from 9584.54) was closed at 9857.79 profit-stop.
Stand aside.
NASDAQ 100 Stock Index
NAS100.I (1443.13 @ 21:01 GMT)
We saw an uptick to as high as 1448. But the rally is fading out, and we may see a pullback to 1410 soon.
Long position (from 1378.31) was closed at 1440.46 profit-stop.
Stand aside.
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