Technical Analysis: DAX Index – Uptrend back in play April 27, 2018 922

  • Strong support at 11,878 and 38.2% Fibonacci retracement level
  • Bullish divergence in the RSI signals a reversal higher
  • Current bullish close above downtrend line signals the resumption of the uptrend
  • Next target for the DAX index is the 13,400 resistance area (+7%)

The DAX index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange.

Tradable instruments:

ETF:
Horizons DAX Germany ETF – (Nasdaq:DAX)
The Horizons DAX Germany ETD tracks a cap-weighted, total return index of the 30 largest and most liquid securities traded on the Frankfurt Exchange.

CFD:
Germany 30 Index EUR1 CFD – GER30.IX

After the parabolic move in the VIX index early February, the risk-off sentiment from the US spread to the rest of the world including the EU and Germany. The German DAX index fell as much as -13% from the 13,596 peak to the 11,706 trough since January, mirroring its US counterpart. S&P 500 index fell as much as -12% intra month. However, with the sharp selloff, the DAX index seemed to have found strong support at the 11,878 area.

From the most recent ECB press release and conference, it is safe to say that the ECB is still in an accommodative stance where further liquidity will be provided if needed. As long as there is no sudden shift in the monetary policy to the tightening side, we believe the German DAX index will benefit from the ongoing easy monetary policy. Inflation data will be the most crucial factor to watch out for in anticipation of more aggressive monetary policy.

The current timeline for the next tapering of the Quantitative Easing program is expected to happen in October 2018 where the ECB will cut the monthly asset purchase size from the current $30 billion to either $15 or $10 billion. After which, the ECB is expected to fully wind down the monthly asset purchase program in January 2019 and only reinvest maturing assets. Therefore, from the liquidity perspective, expect the European equity market to experience some form of gyrations in the later part of the year in Q4 2018, stretching into 2019.

However, the near-term price action outlook appears rosy. With the volatility storm behind us, the current price action outlook is also supportive of a rally moving forward. After falling sharply at the end of January, the DAX index found some strong confluence of support at the 38.2% Fibonacci retracement level and 11,878 support area. The 11,878 area is particularly important because it has been keeping the uptrend intact since March 2017. There were four occasions shown by the highlighted area in the chart where the buyers reappeared aggressively after the DAX index fell to the 11,878 area.

There was no exception for the most recent selloff as well. The DAX index briefly broke below the 11,878 support area on 5 March 2018 but was readily held up at the day’s close. As a result of the major rejection off the 11,878 support area, a bullish price action, Bullish Outside Bar shown by point 1 in the chart was formed signalling a reversal back into the uptrend. Moreover, the recent selloff has also dragged the Relative Strength Index (RSI) into oversold territory since 6 February and more recently on 2 March. RSI measures the general strength of the momentum. A reading above 70 represents overbought condition while a reading below 30 represents oversold condition.

Figure 1:  DAX Index Daily Chart – trending back up

1

Support 1: 11,878                               Resistance 1: 12,948
Support 2: 11,805                               Resistance 2: 13,400

 

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About the author

Profile photo of Jeremy Ng

Jeremy Ng
Research Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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