Investment Idea

Potential weakness as DAX sits at important support level

6 Mar 2018 | 1 min read

German DAX has in the recent week shown indications of weakness. The long trend is starting to point downwards but the index is technically oversold and currently sits slight above support level at 11 850. From here a positive news feed could potentially strengthen the index. Technically the resistance area looks to be quite strong at 12 700-13 000. In the case the index starts finding ground below the support level at 11 850, the index might be about to show further weakness ahead.

Last week German market dropped heavily. DAX index closed the week at 11 913,71, down -4,6 percent. The decline has so far this year increased to -7,8 percent.

However, the week started relatively calm on the German DAX. But since the American president Donald Trump declared that he wants to impose import tariffs on steel and aluminum the market fell heavily.

Germany is a big trading nation and has a lot to lose on increasing tariffs and trade war. Even though the steel industry plays a smaller part in comparison to what it once did in the world trade, this might cause other countries to respond with countermeasures in other trade areas.

The net effect for the U.S might also become negative if for example EU imposes trade restrictions and increased tariffs on agricultural goods and cars from the U.S. So there is a possibility that the American president withdraws his approach.

Furthermore, other countries and trade blocs could adapt free trade between each others, creating a parallel to the Paris agreement, which the U.S rejected. The consequences after the U.S rejection back then lead to an increasing amount of pressure on other parts to cooperate even more on the environmental issues, leaving the U.S isolated.

Technically the DAX is continuously harder to interpret. DAX has in the weekly charts earlier this year triggered weakness when it broke its positive trendline and support at 12 750- 12 800. Additionally, the index broke its 40-week moving average, which is now starting to point downwards. The long-term trend is starting to descend and is increasingly negative.

Weekly chart of the DAX                                                                                                                                     

In the case the index starts finding ground below support levels at 11 850, the index might be about to show further weakness ahead. This could be an indication of the long-term trend becoming negative.

Should the DAX find strength and break the resistance at 12 700- 13 000, potential further strength might be in the ball park. This strength would be an even stronger indication in the event of a coinciding high volume pattern.

Stochastic indicator in the weekly charts is on low and technically oversold levels. Should the DAX for example receive a positive news feed this could increase the possibility of the index to recoil. Although, the resistance area at 12 700- 13 000 looks to be quite strong.

In the short-term daily chart, we clearly see that the DAX in the last couple of months has triggered a number of clear signals of weakness.

Daily chart of the DAX

The last indication of weakness was triggered when the support levels at 12 000 was broken last week. For the DAX to show potential strength in the daily chart the index needs to establish over the resistance at 12 600.

In the hourly chart the DAX might be about to show further strength ahead if the resistance breaks at 12 000. Further ahead, resistance at 12 280 is of interest. Followed by 12 430 and 12 600.

Hourly chart of the DAX                       


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