DAX 30: Traders are Cautious, Bigger Pullback Probably Needed

2015-12-02 12:28:00

Alejandro Zambrano, Market Analyst

The DAX 30 has struggled to trade higher but the overall trend remains bullish above last week’s low of 10,871
E.U. headline inflation increased by 0.1% YoY vs. the 0.2% projected (Bloomberg economist consensus), while Core CPI increased by 0.9% YoY vs. the 1.1% expected. This is all DAX bullish.

The DAX has struggled to trade much higher this week, which is probably due to the strong gains over the last few weeks and this week’s ECB meeting. With this in mind, traders are cautious about adding to their long exposure.

In the short-term, I would expect traders to go long the DAX in the 11,000 to 11,150 range as the risk-reward ratio favours long positions here. Traders will most likely buy dips as long as the DAX 30 remains above last week’s low of 10,871.

One alternative scenario is a break to today’s high of 11,337. In this scenario, we may reach Monday’s high of 11,430 and thereafter the psychological level of 11,500.

Inflation Remains Soft, ADP on Tap

Today’s soft E.U. headline inflation reading allows for the ECB to be more aggressive with its easy monetary policy if needed, a move which signals the DAX as bullish. However, at this stage, the DAX has not been able to break any new levels on the back of the inflation report.

This afternoon the focus shifts to the U.S. ADP employment index followed by Janet Yellen’s speech to the Economic Club of Washington. The Fed releases their ‘Beige Book’ this evening.

According to a Bloomberg News survey, the ADP employment figure is projected to rise to 190k from 182k. We note that the actual outcome tends to be volatile and I am expecting the DAX to remain strong as long as the print is not significantly lower than 190k.

It’s also important to note that U.S. ISM (released yesterday) declined to 48.6 from 50.1. This is the weakest level since June 2009 and highlights the fact that the export and energy oriented manufacturing sector is in real trouble.

It would not surprise me if aggressive traders increase their bearish bets on the back of this report. However, I am not sharing this bearish view at the moment as I see the ECB’s stance, higher E.U. growth in 2016, and the technical trend as being more important.

In other news, U.S. Construction spending in October increased to its highest level since December 2007, while U.S. auto sales rose 1.4 percent to 1.32 million vehicles last month, which is not far away from the industry record for November, last seen in 2001. This eased the bearish news provided by the soft ISM report.