FTSE closes higher but turmoil not over yet

European equities have closed sharply higher today with the UK’s FTSE 100 climbing 3% and the German DAX up a good 5%. Short-side profit-taking has been the main cause of this bounce, though undoubtedly there were also a few ‘bargain hunters’ trying to pick up stocks on the ‘cheap’ and take advantage of the extremely negative market sentiment. The PBOC’s decision to loosen its monetary policy in order to shore up confidence and support growth was also a welcome relief. However the 25-basis-point cuts in the benchmark rates and the 50 bps reduction in RRR is probably not what is required to turn things around. Without further central bank action, equities remain vulnerable and another sharp sell-off this week would not come as a surprise to us.

At the time of this writing, the FTSE is hovering around a technically-important area of 6070-6120. This region had been support in the past and is now being tested as resistance. If the bulls manage to push the index above this region then we may see further follow-up technical buying over the coming days. Conversely, a decisive break below the lower end of this range could pave the way for further sharp declines.

If the break is to the upside, then the FTSE may rally all the way to the next broken support at 6410 before deciding on its next move. Traders will also need to watch the Fibonacci retracement levels at 6285/90 (38.2%) and 6605/10 (61.8%) for further signs of resistance. However if the kick-back rally falters here and the index holds below 6070 then a revisit of the low from Monday, around 5770, would be likely, before we potentially witness more losses.

The general trend is clearly bearish now with the index making lower highs and lower lows. The recent crossover of the 50-day moving average below the 200 is another bearish development. Once the sellers have taken enough profit on their positions, we are more likely to see the resumption of the downward trend rather a continuation towards all-time highs. So, while calmer, the stock market turmoil is by no means over just yet.