DAX 2016 Highs Set To Continue on Bear-Flag Breakout?

2016-08-09 16:05:00

Tyler Yell, CMT, Currency Strategist

Bias: Bullish DAX (CFD: GER30) 2016 Highs Set To Continue on Bear-Flag Breakout?

Point to Establish Long Exposure: Pull-Back To Prior Resistance/ New Support At 10,450

Spot: 10,693

Target 1: 10,973 61.8% Fibonacci Retracement of 2015-2016 Range

Target 2: Hold For Break of 12,383 April 2015 Highs

Invalidation Level: Close below 10,102 (Aug 3 Corrective Low / 38.2% Retracement of 2015/6 Range)

Trade Setup:

The German DAX broke into 2016 highs on Tuesday morning. The additional significance is that the price of the index has broken above a key corrective channel that began in mid-2015.

Chart:

Buying at new highs can be uncomfortable given the unfavorable risk: reward ratio that we found to be so important when we analyzed how our most successful clients traded. Therefore, a pull-back to the bear-flag channel prior resistance could provide an excellent level to enter in the direction of the 2016 trend with a relatively tight stop below ~10,100, which is right below the opening range low of August.

One additional note that builds upon the trade idea is that we’re seeing low-volatility around the globe and money moving into emerging markets. While there are always reasons to be cautious, the improvement in China’s economic data and the price chart breakout could precede a strong move higher in the GE30.

Trader Sentiment:

According to our Sentiment Index, The ratio of long to short positions in the GER30 stands at -3.40 as 23% of traders are long. Long positions are 21.1% lower than yesterday and 48.3% below levels seen last week. Short positions are 15.1% higher than yesterday and 47.0% above levels seen last week.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives a signal that the GER30 may continue higher. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.