What’s inside:
- Sell-off bellow May support is leading to next support zone beginning with the April low of 9441
- Balance of power clearly with the sellers, but risk of a bounce is rising
- From a risk/reward standpoint it is wise to wait for a bounce before shorting
On Friday, the DAX took out neck-line support along with the trend-line off the 2/11 low. Yesterday, we made note of key horizontal support created in May in the 9815 to 9730 area, which if broken would leave little to support the market moving forward for another few hundred points.
Global risk appetite has clearly soured in recent days and even the once bullish looking S&P 500 is turning lower from major resistance, helping reinforce the global ‘risk-off’ environment.
Today, in early trade the DAX is below a parallel off the 4/21 peak, continuing lower towards the next support level at the swing low created on 4/7 at 9441. Below 9441 there is a bit of a range in terms of possible support below there. There is a band of tentative support levels between roughly ~9250 and the 9441, created as far back as September. We will watch how price action reacts upon entering this zone (assuming it does) to help better determine inflection points.
Resistance is pretty clear at this point; the May lows between 9730 and 9815 should put a lid on any bounces experienced in the short-run.
DAX (Ger30) Daily
At this time, the balance of power is clearly in favor of sellers, but beware of a snap-back rally as the current multi-day leg lower has yet to bring any type of meaningful bounce, even on an intra-day basis. It could be a short-lived bounce measured in hours if this turns into a full-on rout, but selling into strong downward momentum without waiting for a counter-trend move can be a risky endeavor. At this point, you would have to ask yourself how you would logically determine your risk without having any technical backstops in place.
The H&S formation we highlighted in yesterday’s commentary points to a much broader move below 9k, but even as such for the short-term trader we need to pick our spots carefully for entries as volatility rises. A bounce would help alleviate short-term oversold conditions while also providing a swing high on the short-term time-frames (once momentum turns back down) from which to assess risk/reward and stop placement (above swing high).
If you have been holding short from 'good' prices, then implementing a trailing stop above resistance is a prudent move.
---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
