DAX about to bounce at technically oversold levels?
Based on a long-term view the German DAX index is technically oversold, and is also currently trading right above significant support levels.
Since last week German DAX index gained +2.2 percent, and closed Wednesday at 12 214.54. Since the beginning of the year the index has gained +6.4 percent.
Market participants have been keeping a close eye on North Korea since last week. This time the North Korea proceeded with a further test, this time a hydrogen bomb. So far, the risk of a full-scale war is not imminent, but it is obviously a bit worrying.
An increasing risk of a potential trade war cannot be ruled out, if the U.S will go forward with sanctions surrounding countries doing business with North Korea. Countries such as China, Russia and a few other countries in Africa. This would clearly be negative, based on a market view.
Upcoming election in Germany on 24th of September could be a potential trigger. So far expectations are that chancellor Angela Merkel will win the election. Everything else is considered to be negative, based on a market view. During the weekend, the debate between Angela Merkel and Martin Schulz, Merkel came out on top, which has increased the expectations even further on Merkel.
On Thursday ECB is coming out with interest rate decision. Expectations are that the rate will stay at the current levels. Market participants will however pay close attention to any clues in regards to when upcoming rate cuts can be expected, as well as any details surrounding QE.
The last few months the euro has significantly been strengthened against the U.S dollar. ECB seems concerned over this, and might therefore be a bit careful when it comes to any statements which would cause the euro to gain even more strength. The strong euro, the lower competitiveness European companies have. Which is neither good for Europe, nor the German market.
Long-term investors look to be slightly more passive due to central banks tightening monetary policy. Continuing to print money seems to be reaching its end. This could potentially dampen the interest from buyers, and lower market expectations.
DAX looks as it might be hesitating more and more based on a long-term view. The stock index us trading below yearly high of 2015 at 12 391, and volume pattern continues to be negative, and the long-term trend looks to be potentially slowing down and reverse.
In the weekly chart below DAX is technically oversold. Weekly Stochastics is also currently at very low levels. On top of that the index is currently trading right above significant support levels. This might cause the index to bounce, even if it would be a short-term move.
In case of a bounce, we are keeping an eye on resistance area around 12 300 – 12 400. Should this resistance area break during increasing market activity, we might be looking at an even stronger move. In such a case, we might even see a new test of the record level from this summer at 12 951.
Weekly chart of the DAX
If momentum picks up in DAX, where buyers steps in during low market activity, gains might be limited. Despite a current oversold scenario and DAX continues to move lower, and find ground below support area around 11 850 – 11870, this would be considered negative.
We are keeping a close eye on the volume pattern, in any move beyond these areas.
Even lower support area is thereafter awaiting at around 11 400 11 500, followed by 10 800.
In the hourly chart below, we believe to experience short-term strength, which increases the probability of a bounce. DAX is trading around a technical support area, as well as at 200-day moving average, which investors quite often use as an important parameter.
As long as support holds up, there is short-term probability of a bounce. DAX closed near the daily high, during the bottom at 29th of august. This caused DAX to signal a reversal. A positive divergence also came to light in the Stochastic-indicator. The indicator has not made any new lows so far, when the index itself has traded lower.
Daily chart of the DAX
As long as support area hold up at around 11 850 – 11 870, we might find short-term strength. It is always advised to stay prepared in any case, as some investors might await confirmation where the index would find ground above 12 300 – 12 400 during increasing market activity before taking any decision. Same applies to any stops investors might use, always minimize risk at the right time.
In our hourly chart below, DAX continues to trade with volatility within its consolidation area, between support levels around 11 868 – 12 000, and resistance levels at around 12 200 – 12 330. Within this area, DAX picked up momentum once it broke resistance at 12 210.
If the stock index would start trading above resistance around 12 260, 12 330, momentum might cause the index to move even higher. The same thing applies, if the index would start trading below support around 12 210, and 12 067.
Hourly chart of the DAX
Even if there is a slight higher risk at the moment, as DAX is technically oversold, and trading right above a significant support area, it does looks promising for a potential bounce.
Short-term there seem to be more opportunities available, especially if market continues to have a higher trading activity within its upper level inside its consolidation area.
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