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Will the DAX Crack or Cower from Resistance?

Will the DAX Crack or Cower from Resistance?

2015-11-17 21:30:00
Tyler Yell, CMT, Currency Strategist
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Point to Establish Long Exposure: After Weekly Close > 200-DMA / 40-WMA

Target 1:11190 Weekly R2 Beyond Multiple Resistance Confluence

Target 2:11804 July Price High

Invalidation Level:Close below 10,489 (November Corrective Low / Ichimoku Cloud Support)

Fundamental & Technical Focus:

As Fogerty once sang, “It's like Déjà vu all over again.” Today’s pick is a second verse from the same song that was played earlier this year. Namely, the European Central Bank is looking at expanding Quantitative Easing at the December 3rdmeeting, and the market is taking that as a clue that the economic engine of Europe, the German economy could benefit the most. This possibility has caused both the Bund (German government debt) and the DAX (Deutscher Aktienindex (German stock index)) to go bid. However, we’ve now run nearly into resistance and the price reaction around resistance could foretell the next 1000+ point move.

In short, the price is coming into multiple resistance points that are worth recognizing. Additionally, GER30 is moving higher off bullish divergence as an attack on 200-DMA seems all but certain. In addition to the 200-dma, GER30 is coming into trendline resistance from the April and July highs. A price break with a daily close above this key April/July trendline and the 200-DMA could further the argument that the next 1000+ point move is higher. From a sentiment perspective, DailyFX SSI shows a short retail bias of -1.7229 with ~1500 traders short and ~870 long.We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives asignal that the GER30 may continue higher.

Chart:

Will the DAX Crack or Cower from Resistance?

One additional note that builds upon the previous comment about the ECB potential expansion of Quantitative Easing is what’s happening in the options market. The Dax ETF and CFD contracts have pushed the DAX market cap back near last seen in April and ~10,850 is roughly half the range of the April-October range. Speculation that the DAX could recover much more than half of the range has sent the cost of bullish contracts to the highest levels in 5 years relative to bearish DAX contracts. This development goes hand in hand with the EUR trading near 6-month lows due to Monetary Policy Divergence from the ECB & Federal Reserve.

GER30 Resistance & Support Levels

2nd resistance: 11804 July Price High

1st resistance: 11,092 200-DMA

Spot:10,890

1st support: 10677 Friday, November 13th Close

2nd support: 10489 November 16th Gap Open Low / Ichimoku Cloud Support

Trade Setup:

Buying into resistance isn’t my idea of a reasonable trade. The 200-dma and downtrend from April & July highs will help explain where we’re going from here. Due to the push higher from October 1st, I believe we could maintain a move higher that eventually tests and breaks the July high if the gap support of 10,610/10,492 can hold. However, a break and daily close below the gap support would put the pressure on the EUR to signal what could be the next big move though the bias would be lower. In that case, I would be looking to short GER30 on strength with a tight risk: reward with a stop above the failure or at 200-dma and a profit target set for 9,300.This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading. The October low would be the eventual target though a failure at the 200-dma can send a market multiple % points in the direction of the failure.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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