Investment Idea

Strength appears in DAX

03/11/2017 | 1 min read

Last week strength appeared in DAX, when it broke resistance at 13 100. Technical trends still show potential of continued strength up ahead. The index is however, technically overbought and volume pattern continues to be negative.

German market continued to move higher the past week, during relatively low trading activity. German DAX-index gained +1.7 percent, closing at 13 229.57 on Monday. The index has gained +15.2 percent this year alone.

In absence of geopolitical issues, strong earnings reports and a global optimism of growth is driving the development of the German stock market.

Last weeks unchanged rate decisions from ECB, and cut of monthly asset purchase caused the euro to weaken against the U.S dollar. When the euro weakens, German competitiveness increases, and stimulates underlying strength in the German market for future gains.

Not even issues surrounding German government, and on concerns of Spanish independency in Catalonia has caused any real effect in the market.

The last few months DAX has showed continued strength, and is currently believed to be technically trading in a positive trend.

Looking at the weekly chart below, the index is showing a clear pattern of higher highs and lows, and its 40-week moving average is showing an indication of continued strength up ahead.

Weekly chart of the DAX                                                                                                                                     

Stochastic indicator is showing that German market is significantly technically overbought even in this long-term perspective, this however is not considered as a clear sign of weakness up ahead, but increases the likelihood for a change of sentiment. This is more considered as a piece of the puzzle, in case DAX would start to show real weakness.

Another warning sign is believed to be the negative volume pattern that persists. Days when the market has traded higher, is still not particularly larger than on days when the market has been moving lower. This could be a potential sign that long-term investors are not currently net buyers. This could further on add on to negativity in case the index would start moving significantly lower during a larger trading activity compared to previous days when the market has been moving higher.

In case German DAX would break support area around 12 900 – 12 950, together with a significantly higher trading activity, this could be a potential sign of more serious weakness, from a technically overbought scenario. But until then, there are signs of potential strength up ahead.

Based on a more short-term perspective, looking at the daily chart below, there are still signs of strength up ahead. DAX has showed signs of strength, and technical trend is still believed to be strong, especially since the index broke resistance last week, when trading beyond 13 100.

Daily chart of the DAX

Even in the daily chart the Stochastic indicator and volume pattern are giving mixed and slight warning signals.

Stochastic is showing potential weakness up ahead, and beyond this the indicator is showing a negative divergence against the index. When DAX shows new highs, the indicator shows lowers highs. This is a potential sign that the strength in the market gain is about to pan out. On another side note, the index is neither showing any significant daily volume during days when buyers dominate the market compared to sellers.

The DAX could be looking at weakness if it breaks support at 13 100 and around 12 900, in case trading activity gets significantly larger during such a scenario.

So far in the considerably shorter time frame, looking at the hourly chart below the DAX could be looking at further strength in case resistance at 13 250 breaks. In case DAX instead starts moving lower and break support at 13 200, it could be looking at a short-term lower move. Next support level in such a case, is closely waiting at 13 100.

Hourly chart of the DAX                       

The DAX seems to be in a slight predicable scenario, on one hand it shows strength technically, but the market is technically overbought and volume pattern continues to be negative.

Technical support at 13 200 is closely holding up current scenario, but 13 100 is closely waiting thereafter. Resistance is equally holding up at 13 250, and could be a potential trigger for future strength up ahead.



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