DAX 30 Is Bearish below 10,815, Risk-aversion Dominates After Paris Attacks
On Friday, the breach and close below the September 27 low of 10,684 left the DAX 30 trend bearish. This comes about as the market prepares itself for a Fed rate hike in December and on last Friday’s soft U.S. retail sales. Also adding to the bearish sentiment in today’s session is the news of Friday’s terrorist attacks in Paris.
My 6 to 12 month outlooks remain bullish as I expect the DAX 30 to be supported on higher E.U. and U.S. growth, with the ECB to be supporting the market, and the negative effects of the first Fed rate hike not to last for more than 3 months after the actual hike.
Targeting a 50 Percent Pullback
The technical trend is downwards below Friday’s high of 10,815 and a 50 percent pullback targeting 10,474 following the ECB fueled rally from 9892 to 11,058 seems probable. In the case 10,474 is breached, the DAX index may reach 10,338 and will therefore provide for a 61.8% correction.
The trend turns neutral in the case that the German DAX breaches its Friday’s high of 10,815.
E.U. CPI and U.S. Empire Mfg. Index On Tap
Euro-Zone Consumer Price Index is on tap this morning, however, as it’s the final estimate I don’t expect it to carry too much weight and the readings must turn aggressively higher in the months ahead for the ECB to back off from its plan to flush the markets with more liquidity. More important is this afternoon’s U.S. Empire manufacturing index for November. Economist consensus expects an outcome of -5, which would be a clear improvement from the -14.97 in August. The index appears to have bottomed out.
Trigger Behind Friday’s bearish DAX Close
Friday’s U.S. Retail Sales increased by 0.1 percent MoM vs. a Bloomberg news survey projecting a 0.3% MoM increase. The YoY growth is now at 1.7 percent from 2.2 percent in September. The trend of the YoY growth has been declining since 2010 when the growth rate was near 8 percent YoY.
This has raised voices of U.S retail sales indicating that a U.S. recession is underway. However, several market participants seem to have forgotten that U.S. retail sales are not adjusted for inflation. If we adjust the annual growth in retail sales with annual growth in U.S. headline inflation, the reading is stable since 2012 and therefore far from predicting a recession. With inflation being at zero percent year-over-year, U.S. retail sales need to reach a growth rate of zero percent YoY to indicate that a recession is underway.
Created with Marketscope/Trading Station II; prepared by Alejandro Zambrano
--- Written by Alejandro Zambrano, Market Analyst for DailyFX.com
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