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DAX: Snap-back Rally Brings Familiar Resistance Zone Back into Play

DAX: Snap-back Rally Brings Familiar Resistance Zone Back into Play

What’s inside:

  • DAX swiftly takes out 9730/815 resistance, now testing larger area of resistance
  • Broader construct still bearish, but…
  • We will stand aside in the short-term until the 'Brexit’ vote is in the rear-view mirror

Yesterday, the DAX tacked on over 3% in response to the upswing for the "UK to Remain" campaign over the weekend; the outsized gains experienced in European indices indicated the market was caught off guard by the latest developments in the drama leading up to the vote later this week.

(For more on 'Brexit', check out these two pieces written by my colleagues: “GBP/USD Surges Above $1.4600 as Brexit Odds Plunge” and “The Build-up to Brexit”.)

Given the enormity of this week’s event, establishing positions with intent beyond day-trades doesn’t make much sense unless one is convinced of the outcome; on this end we would view it as being prudent to take a wait-and-see approach and then react accordingly.

With that said, let’s take a look at the DAX from a broader view today. Thursday, the German index found support just beneath the April 7 swing low in the 9400s. The subsequent rally, with the help of the shift over the weekend, left our prior support now turned resistance in the 9730/815 vicinity nothing more than a formality in its attempt to cross. Under “normal” circumstances it seems likely the DAX would have least struggled with the resistance zone, but these are not "normal" times.

The three-day rally pushed the DAX all the way back to a full neck-line retest of the multi-month H&S formation it broke down from last week. It could soon turn lower from here as a successful retest, but given event risk we will stand aside at this time even if momentum shifts lower and presents an attractive opportunity to enter. Regardless of the outcome, if the DAX moves much higher from here, the H&S formation will be reconfiguring itself, and while the market may still have a bearish stance once the dust settles (lower highs, lower lows from the April high), we may need to operate under a different set of technical constructs. To be determined...

From a simple support and resistance standpoint, there are several intersecting lines of resistance in the ~10000/100 vicinity; H&S neckline, under-side of the Feb 11 t-line, multi-month horizontal resistance, and the underside of the 2011 t-line (a little higher).

The 'macro-tech' outlook remains intact; the period from February to April is viewed as a bounce within the broader downward channel off the 2015 highs, with price action since the April high beginning a new leg lower. Until we see the channel broken on the weekly chart, risk remains skewed to the downside.

DAX Daily(Weekly)

Looking for tools to help sharpen your skills, or forecasts for the remainder of the year? Check out one of several trading guides.

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX, and/or email him at instructor@dailyfx.com.

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

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