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DAX 30 Pressured to the Downside as Volatility Becomes an Issue

DAX 30 Pressured to the Downside as Volatility Becomes an Issue

Daniela Sabin Hathorn, Analyst

Key Talking Points:

  • DAX 30 looking for support as bearish pressure mounts
  • Speculative trading causes a spike in volatility followed by a risk-off move
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The DAX 30 is struggling to recover from yesterday’s selloff as risk-off sentiment took control of the markets. The ongoing coronavirus pandemic continues to be a big concern for investors, but yesterday’s price action was mostly driven by a spike in volatility in US equity markets.

A sudden surge in buying interest in some stocks like GameStop and AMC Entertainment brought on by a coordinated effect on Reddit has led to a few large hedge funds having to liquidate their short positions as the price of these stocks kept on rising, pushing prices higher, at the same time as option sellers found themselves piling into the market to cover their losses.

This meant other positions were having to be liquidated to ensure enough margin to cover running losses which sparked a widespread risk-off move which was exasperated by the large number of orders coming into the market at the US open.

Whilst talking about a bubble is a sticky subject – it always is until it explodes – there is no doubt that equities are treading on a fine line at the moment after a few months of “buy all” mentality. Yes, one or two stocks do not constitute the market, but it’s not like stocks are in need of anymore bullish sentiment. And the events that have unfolded in the last few days show the power of retail investors if they come up with a coordinated effect, ignoring all fundamental and technical reasoning behind a trade, just for the sake of beating hedge funds.

With all of this information to digest, and a lack of actual positive reason to continue heading higher, I expect the markets – European stocks at least – to continue to correct lower in the short-term, as there is still further room for losses before a fair equilibrium is reached and new buyers may be attracted.

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DAX 30 4-hour chart

DAX 30 Pressured to the Downside as Volatility Becomes an Issue

Now that the DAX 30 has broken below key support at 13,600 it has entered a new range between the last two remaining resistance/support lines before price heads towards 13,000. To the topside, buyers are now struggling to creep back above 13,600, which has now turned into short-term resistance, whilst support can be expected at 13,315 if we see price fall below 13,400 during today’s session.

If unable to hold, the next strong support may be seen around 13,220 before heading towards the psychological 13,000 mark.

Germany 30 MIXED
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 23% -25% -14%
Weekly -30% 3% -11%
What does it mean for price action?
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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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

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