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DAX: Dead Cat Bounce Leads to Support

DAX: Dead Cat Bounce Leads to Support

Paul Robinson, Strategist

What’s inside:

  • Broader trend is lower based on H&S formation, global synergies helping out
  • Small bounce led to test of support so far today
  • On the watch for cues to short-term set-ups within bigger picture scope

We are currently working within the broader framework of a breakdown from a head-and-shoulders pattern, which projects much lower prices ahead. It’s not just the DAX which is breaking down from this bearish formation, but the CAC and FTSE, too. You can even throw in the Nikkei breaking down from a consolidation version of the pattern (The Nik traded just below its 4/7 low as well just earlier this morning). And all these major indices have something else in common: clear downtrends going back as far as 14 months; it was the DAX which actually peaked first amongst major global indices.

So with the market leaning lower through our ‘macro-tech’ lens, let’s dial in and look what’s going on in the short-term. On Tuesday, the last time we discussed the DAX it was made mention that the balance of power was in favor of the sellers, but risk of a bounce, even if short-lived, had become elevated. So it was, a small rebound ('dead cat bounce') developed into yesterday, but quickly faded out. This lead us to today where the DAX continued lower, but then found support from just beneath the April 7 swing low of 9441 (today low 9433).

Before the risk of a bounce was based solely on the premise that the market had fallen too far, too fast. Now the risk of a rebound is based on tangible support levels at hand. If a meaningful bounce doesn’t result today, and we see a strong close below the April low, then a drop into the 9200s or worse in the short-run becomes the risk.

For those looking to establish fresh shorts, ideally the DAX bounces into staunch resistance up above in the ~9730 to 9815 area before resuming lower. The bottom-side parallel just above may prove to be an inflection point, the DAX was incapable of holding yesterday's rally above it. Even if we don’t see our ideal scenario, if the market fails to respond to support in a material manner, we will look for other technical developments to help guide us. On this end, rejections on counter-trend rallies into resistance and consolidation patterns (triangles, channels, bear-flags, etc) are the preferred set-ups.

DAX (Ger30) Daily

Find out what characteristics are common among successful traders in our free guide, “Traits of Successful Traders”.

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

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