Following on from the big falls on Wall Street on Monday, the downward pressure continued overnight in Asia while Europe has just opened on the back foot, too. At the time of writing, the UK’s blue-chip FTSE 100 index was down 0.3% while the German DAX was 0.8% worse off compared to Monday’s close. It comes after the Nasdaq Composite sank 3%, while the S&P’s technology sector was the worst performer as it dropped nearly 4% yesterday. Shares in the likes of Apple, Amazon, Facebook and Nvidia were hit the hardest as investors fled the technology sector.
Monday’s sharp sell-off in US technology shares is a reflection of investor concerns over global demand following the recent emerging market currency crises and trade disputes. Big falls in recent months for the likes of the Chinese Yuan, Turkish lira and Brazil real meant that demand from these emerging markets would be hit, especially for high-end US goods thanks to the simultaneous appreciation of the dollar as the Federal Reserve continued to normalise its monetary policy amid signs of an improving economy while raised import tariffs further pushed up inflationary pressures.
We are now witnessing some of the impact of these macro factors, for example on sales of Apple’s iPhones and German cars from emerging markets. The Wall Street Journal has reported that Apple is indeed reducing the production of its newest smartphone models after some of its largest suppliers warned of weaker demand amid signs of stagnating global sales of tablets and smartphones. It is not just Apple, but a disappointing outlook from Nvidia last week has seen shares in semiconductor companies such as Advanced Micro Devices also drop sharply.
Investors are also worried that the US-China trade war could escalate further following the tense dialogue between China’s President Xi Jinping and US vice-president Mike Pence, at the Asia Pacific Economic Co-operation summit. Meanwhile reports that Chinese investigators had found “massive evidence” of anti-competitive behaviour by the world’s top three chipmakers has further dampened the appeal of technology shares.
So, as things stand, the outlook for global equity indices appears bleak and we could easily witness further falls, especially for US markets after their oversized gains over the years. But even the European indices, which have underperformed their US counter parts, could fall further before they potentially bottom out. Among these indices, the closely-followed German DAX has been the hardest hit. And judging by recent price action, it does indeed look like there could be further follow-up technical selling pressure to come.
The DAX has already been making a series of lower lows and lower highs. As a result, a bearish trend has been established and this has been further confirmed by the positions (i.e. above current levels) and slopes (downward) of the 50- and 200-day moving averages. From here, it looks like the bears might be targeting the liquidity underneath the October low at just below 11050. If this area were to break down the next bearish objective would be the top of the shaded region on the chart at 10825, which was formerly resistance.
Meanwhile in terms of resistance, the 11250 level is the first line of defence for the bears. If the DAX were to break this then 11420 could be the next bullish objective. However we would only turn bullish on the DAX when it forms a higher high. The most recent high was at 11855, which is now the line in the sand as far as us maintaining our short term bearish bias is concerned.
Source: TradingView and FOREX.com