DAX 40 & DOW JONES: weekly analysis 23rd – 27th October

Market movers

This week major US stock indexes experienced a significant decline, following Federal Reserve Chairman Jerome Powells speech regarding sticky inflation and the likelihood of an unchanged interest rate at the November meeting. Treasury yields have once again breached the 5% threshold, a level not seen since 2007. In the meanwhile, geopolitical tensions are rising. Israel is on high alert due to the potential escalation of the conflict with Hamas, while the United States and other Western nations have advised their citizens to leave Lebanon. The US quarterly earnings reports are reflecting a mixed situation, with gold surging as investors seek safe-haven assets.

The economic calendar for the week will bring some particularly important data.

Lets begin with Tuesday 24 October, when we will evaluate the PMI in different sectors for Germany, the European Union, and the United States.

On Wednesday 25 October, in Australia will be released inflation data while in Germany we will monitor the IFO Business Climate. In the United States, we will have the building permits and the new home sales. Finally, the BoC will announce its interest rate decision. Cooling inflation has raised bets that the central bank will not hike interest rates at the October meeting. However, the Canadian central bank does not rule out further hikes in interest rates even in the background of growing geopolitical risks. Powell will deliver his speech after the market closes.

On Thursday 26 October the ECB will announce its interest rate decision. The meeting comes after the ECB raised interest rates by 25pbs in the September meeting and hinted that was the last rate hike of the cycle. Recent speeches by ECB officials, combined with cooling inflation and weak economic data, have supported the view that the central bank is at the end of its rate-hiking cycle. However, oil prices have spiked sharply, and investors will watch closely to see whether this changes the central banks stance.

Moving on Friday, the crucial data will be the PCE Core, which is the FED‘s preferred measure to gauge inflation. Investors are keenly interested in this data set as it provides insights into the FED’s potential course of action at its meeting on November 1st.

This week some of the largest publicly listed companies in the world will report. Microsoft, Alphabet, Meta, Amazon, and Apple are all due to release quarterly earnings figures, and all five companies are expected to grow headline earnings. However, some will grow faster than others, boosted by cost-cutting efforts, resilient growth, and new AI prospects. The strongest earnings growth is expected for Meta and Amazon, while Apple is expected to post the weakest earnings growth.

Weekly analysis and market scenarios for DAX and Dow Jones

The international stock exchanges concluded the trading week posting multiple bearish signals. In early October the markets posted a large rebound as expected, however, the weekly closure witnessed notable downward pressure which will likely push price levels to new lows. Inflation is not retracing as rapidly as expected while the strong economic growth could force Central Banks to further rate hikes. The bond market is experiencing pressure, with the US 10-year yield at 5% and showing potential for further increases. The geopolitical scenario remains challenging.

From the lows of the week of March 13, the rise of the international stock markets has been incredible. The thesis that supported a lead to a very strong climb until August 4th, the annual setup, was confirmed with almost millimeter precision. Everything occurred as we predicted, and between September 2022 and March 2023, all international markets posted their temporary lows (which could also be the ten-year lows).

At this point, we might see another 10% decline by the end of November. The long-term trend would not be affected, but failure to rebound from the annual set-up in late November could worsen the situation.

The next crucial days will be toward the end of the month, and we should monitor if we can reach the months low and in that case, the market could rebound.

Beyond the rhetoric of the debt ceiling, the recession, and the banking crisis, only a decisive flip in sentiment could lead to a trend reversal. Earnings of US mega caps have shown off and many other companies are also ramping up the increase in revenue.

The average annual returns on international equities (World Stock Exchanges based on GDP) are around 11%. Current rates in America are more than 5%. With a projection for 10, 15, and 20 years, equity markets always beat bond markets. Therefore, we should be at the starting point of a 10-year bull market.

Rising interest rates wont directly and inevitably lead to a recession. As long as these hikes are balanced with economic growth, there should be no danger. On the other hand, an exaggerated rate cut could drag down the markets for a long time.

The likely lows in October 2022 will have a high probability of remaining so for many years. They could represent the lows of the entire decade. Despite some short-term overbought, the markets are unstoppable and will be so for a long time. Here is why.

We have highlighted several times that stock prices tend to move at least 6/9 months before the economic cycle. For this reason, during the final part of 2022, the markets would have posted a significant bottom between June and October and then taken off again for the long term. The prices marked during the year had discounted the most unfavourable geopolitical and geo-economic conditions.

During 2023 we expect the following pattern to emerge: the low should be posted in January or during Q1 2023, and the high during Q4. Average market returns up to 20-25%.

As always, we will confirm the annual forecast from time to time.

Last week, the S&P500 index posted a significant decline, after attempting to break down again the weekly resistance 4411-4416, but without success. Prices closed in the 4244 area on Friday.

The 4227-4223 have been confirmed and in these areas, trading volumes managed to concentrate as a result of the rise that began at the end of June.

Below 4223, there are high chances for further drawdown acceleration targeting the supports at 4204 and 4196-4190. 4177-4170 is still a critical mark.

Confirmed the supports in 4153, 4144-4140, 4124-4117, and 4100 areas. The loss of the latter support could lead to heavy drawdowns

Confirmed the supports in 3930-3905-3899, 3945-3957-3961, 3979, 3993-4000, and 4032-4043 areas. The 4064-4075 areas remain a crucial support.

3890-3879 is still a critical area because, in this specific area, buyers managed to concentrate. Additional support in 3864-3857 areas. Another intermediate zone is located in the 3822-3814 area.

Support in the 3808-3798 zone was confirmed, below which prices could start a new downward spiral.

Confirmed supports in 3669, 3680-3689-3701, 3711-3726-3733 areas.

3762 and 3711 are the monthly levels that support the current uptrend, so beware of any breakout of these levels: We could witness a new trend inversion.

The psychological support of 3600 remains crucial. The support at 3644-3651 has halted the fall and is now the monthly support after this solid uptrend. It shouldnt be reached again, to avoid new and heavy downward movements. Below is the 3607 level. Then again, the 3557-3547, 3538-3524, and 3514-3507 are support levels. The 3485 support is now the annual, critical, and historical level for the S&P500 index. We will monitor whether this last level could stop, at least in the medium term, the bearish direction of the markets. Should we go beyond it, 3200-3300 will be the target, sought after by funds, investors, and traders halfway around the world.

New resistances in the 4260-4274 and 4289-4309 areas. New weekly resistance in the 4327-4350 area, the recovery of this level would open up the possibility of catching again the bullish trend. Other resistance in the 4379 and 4401-4409-4415 areas.

Above the latter level, the potential of strong bullish pressures remains, with intermediate resistance targets in the 4430, 4454, and 4470-4503. This entire area should be regained back to a rebound in price levels.

4510-518 is confirmed. Intermediate resistance in the 4525-4538 area and key resistance in the 4557-4564 area.

Confirmed 4575-4580 and the resistance offering a new bullish lunge in the 4595-4607 area. Resistances 4617-4622 and 4629-4632 are confirmed.

The upside targets are still 4662 and 4680, beyond which critical resistance levels must be overcome before reaching new all-time highs.

The weekly closure above 4613 guarantees the annual trend reversal if confirmed on a monthly basis; the following targets remain 4717 and 4780

How to move？ There is a sell-off underway that hasn‘t been witnessed since last year. All time frames, from monthly to daily levels, are switched to bearish positions. Let’s brace ourselves for days of panic and significant bearish movements. Caution is the watchword. Currently, it is not statistically the right time to trigger trades in the upward direction. It is therefore a good idea to wait for weekly closures, above the key resistances, before considering a bullish position.