 Hello and welcome to CMC Markets on Tuesday the 21st of October and the weekly market update. Now last week I covered the German DAX, the S&P 500 and the US small cap. All three indexes had made key breakouts from key support lines. Since then we've seen quite a bit of volatility. Most of it central bank induced. Comments by James Bullard on voting member of the US Federal Reserve's FOMC policy making committee appear to suggest that the Federal Reserve might feel compelled to pause their tapering program due to concerns of the Fed might miss its inflation target. Now whether or not you believe that is in any way credible stock markets performed a massive U-turn in the space of about 24 hours. The FTSE 100 went from lows of 6,073 to be trading back above 6,300. The S&P went from 1825 it's back above 1900 and the DAX and this is the DAX I'm going to be particularly paying attention to in this week's update. The DAX went from lows of 8,435 to be trading pretty much back up near its breakout level at 8,900. Now since then a voting member of the FOMC Eric Rosengren Boston Fed has suggested that the Fed will not be delaying the taper it will end at the end of this month but nevertheless stock markets have continued to remain resilient. I think on the basis that central banks essentially are likely to have their back there's been a story out this morning that the European Central Bank may be looking to buy corporate bonds maybe as soon as December or January. Now that has been denied but nevertheless markets are seizing upon that as further evidence that central banks are probably going to keep interest rates very very low for the foreseeable future and as such keep borrowing costs low as well and that should help to underpin stock markets but and it's a big but I'm not so sure about that. We've seen a significant bounce back in the S&P and the Russell they're back above their support lines but more importantly the DAX thus far is not. So let's start with the German DAX daily chart now you can see from the price action on this particular chart that there's a very long shadow on that candle where we made the low at the end of last week or towards the end of last week and you could argue that that's potentially a hammer we've seen a significant bounce back on the daily charts but as yet we haven't actually got back above those two support or those two resistance lines rather between 8,900 and 9,000 and given the sharpness of the breakout what we really need to see I think on that chart is for the price action to push back above and close above the 9,000 level. So how likely is that to happen? Well let's actually zoom in a little bit and look at the 4-hour chart now from the 4-hour chart you can I've drawn some Fibonacci retracement levels from the highs that we saw in mid-September and then gone from the lows at the end of last week 8,350 was the low we've seen a significant bounce back now if you look at that very very carefully is there some evidence of an inverse head and shoulders starting to form on the 4-hour chart and if so is that 4-hour chart head and shoulders does that carry more weight than the breakout on the daily chart? Well that's the key question at the moment we're still below that 8,900 level and while we remain below that 8,900 level then the risk is for the DAX to continue to push lower if we close above 9,000 then we could well get a sharp breakout towards that upper moving average which roughly comes in around about the 9,300 level so at the moment based on two completely different charts there's potentially two different scenarios that could play out with respect to the DAX and let's bear in mind that for quite some time US markets and German markets had actually converged now they're starting to diverge so essentially what I'm asking here is can US markets continue to push higher while at the same time we get a potential cap in German markets let's not forget the economic data out of Germany continues to disappoint we've got PMIs out later this week we had Chinese data earlier today which was a little bit disappointing Germany is a key exporter can the recovery in German stocks be sustainable if China continues to disappoint and also the fact that Germany's key export markets continue to disappoint that's the big question going forward furthermore is it likely the ECB will be able to do any more than it's already committed to do for quite some time now the US dollar has been pretty much a one-way bet I think there have been an expectation that the dollar would continue to go higher now there seems to be some doubt over that and I think it's not too much of a surprise given some of the concerns that have been expressed by various FOMC members about the strength of the dollar so what does that mean for monetary policy from the Fed more importantly I think there's an expectation that maybe the ECB may not be able to do that much more and there's also the fact that the pound actually looks as if it could actually be building up a little bit of a base as well so have the dollar gains that we've seen thus far are they likely to actually start to lose some ground and I think there's a good chance we actually could see a bit of a bounce in euro dollar and cable so let's look at a couple of charts with respect to my views that we might see a potential bounce so we'll start with the euro dollar daily chart and for the moment it doesn't look that conclusive now I've drawn some Fibonacci retracement levels from the high in May just below 140 coming back from the lows that we saw at the end of September in the beginning of October now we haven't really bounced really that far and the oscillator is starting to come a little bit overboard that being said we did post a fairly bullish daily candle at the beginning of October so that would seem to suggest that maybe there is a significant amount of buying interest down there but it's not it's by no means conclusive we're still well short of the 38.2 percent retracement level which currently comes in just above the 130 level so let's let's zoom in a little bit further and let's go to a four-hourly chart now that gives us a little bit more clarity we can see that we're in a very nice upward channel from those same lows at the end of September beginning of October and that trend line support comes in just above 127 so while we're above 127 momentum still remains positive for euro dollar but it's building up a nice little top round about 129 so what we need to see is a breakthrough 129 to push towards 130 so those are the key levels 127 20 on the downside 129 on the top side so we'll finish up today's weekly market update with the pound against the dollar now a lot of the economic data that we've seen thus far out of the UK has given some indications that maybe we've seen a bit of a plateau in the growth cycle certainly the GDP numbers that we've got coming out later this week would appear to suggest that that is in fact the case we're expecting a slow rate of growth for the third quarter and the likelihood is we could see a slightly slow rate of growth for the fourth quarter as well that being said this daily chart on the pound against the dollar does appear to suggest that we're getting some divergence between the oscillator and the charts and it is actually forming a descending wedge on the downside which is potentially bullish if it breaks to the top side so what we need to see on this daily chart here is a breakthrough 161 4050 if we get that break then we could potentially break back towards 163 and even 165 so keep an eye on the divergence on the cable daily keep an eye on the descending wedge if we get a break of that descending wedge that could actually push us higher towards 163 and 164 so that concludes this week's weekly market update as is always the case if you have any questions about anything that I've covered in this week's update you feel welcome to tweet me at m hueson underscore cmc at the bottom otherwise until next week thanks very much for listening this is Michael hueson talking to you from CMC markets