Investment Idea

Will the DAX consolidate before a breakout?

19/12/2017 | 1 min read

German DAX-index continues to consolidate before a potential breakout. Potential strength could come to light in case the index would find ground above resistance 13 240 and around 13 525, during increasing trading activity.

Last weeks trading on the German market continued to show an irregular development. The DAX closed the week at 13 103.56, down -0.4 percent. This years gain on the DAX has now been limited to +14.1 percent.

On the international front, situation continued to be relatively calm, despite a rate hike from U.S central bank Federal Reserve. The rate increased from 1.00-1.25 percent to 1.25-1.50 percent, already expected from market participants, hence not causing any significant movement on the market.

European central bank (ECB), did not signal any changes to its rate, nor any further changes surrounding its stimulus package.

ECB-president Mario Draghi highlighted that he has not seen any negative effect from the Feds rate hike, and that the European union and U.S economic recovery is on different stages, therefor differentiating itself from its monetary policy.

Positive signals came from U.S congress, that republicans might unify surrounding a potential tax cut. This is expected from market participants, and is already considered included in the past years market gain since Donald Trump was elected President of the United States.

Turning over to the weekly chart below, DAX continues to show a long-term positive outlook. The index shows a clear pattern of higher highs and lows, and its 40-week moving average shows strength, and DAX is also trading well above this indicator.

Weekly chart of the DAX                                                                                                                                     

Stochastic indicator shows a warning sign, that the strength in the latest move has weaken. DAX also continues to consolidate, but since its trading above support area around 12 800 – 12 900, strength continues to highlight the technical view.

In case the index would break resistance around 13 525, the DAX could be looking at further momentum, preferably during increasing trading activity.

Moving over to a shorter timeframe, the daily chart below shows the consolidation more clearly, building momentum before any upcoming move.

Will it be a positive or a negative breakout? Since the technical view shows potential strength up ahead, the probability seems to be on that side, but one can never be sure, and it might be safer to wait for a confirmation in terms of a breakout.

Daily chart of the DAX

In the daily chart strength could be in order, in case the index starts breaking resistance at 13 240 and around 13 525, during relatively high market activity.

On the other hand, if DAX starts to break support levels around 12 900, and around 12 810 – 12 790, continued weakness might be in order.

Moving over to our shortest timeframe, the hourly chart, technical strength could be in the ballpark in case the index breaks resistance at 13 140, 13 190 and around 13 240.

In a scenario where weakness start to dominate the DAX, breaking support at 13 000 might turn the table.

Hourly chart of the DAX                       

All in all resistance at 13 140, 13 190, 13 240 and 13 500 in a more shorter timeframe is of interest, as well as support at the sentimental 13 000 level.

Breaking this sentimental 13 000 level, upcoming support level of interest is then 12 800 – 12 900.

As often is the case, potential breakout or breaking support and resistance during increasing or relatively high market turnover might be a signal of continued momentum.


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