DAX: Relative Weakness Makes it a Target for Sellers

What’s inside:

• DAX lagging behind other global markets
• Resistance levels noted just ahead
• Relative weakness makes it a short candidate

The notion that indices across the board would experience small, short-lived bounces has been generally wrong – looking at you FTSE, which has done a full reversal off the ‘Brexit’ panic low, and the S&P 500 which has torn through upside levels in its own right.

Other key global markets – Japan and Europe – have had been far more subdued in their attempts to take back the Friday/Monday swoon. When looking across the spectrum of world markets and seeking out what is a better sale and a better buy from a relative strength standpoint, the DAX is sticking out as the obvious laggard.

In regards to the disparity between the UK stock market and the rest of Europe, yesterday James Stanley wrote, “This raises the very legitimate question as to whether a Brexit scenario may bear more risk moving forward for the U.K., or the European Union that they’re choosing to leave behind.” (Check out the full commentary here.) Indeed, a legit question to ask.

In any event, the DAX is one weak market along with the Nikkei which hasn’t experienced all that much of a recovery, either. The DAX and Nikkei hold an impressive 1-year correlation of 90%. While all major global markets are correlated, this is extreme. But it makes sense when you look at the similarities in monetary policy adopted by the ECB and BoJ.

We have noted lately that the big picture downtrend off the 2015 record highs remains intact, and will continue to do so as long as it doesn’t breach the upper parallel off the high created last year. If it does, then the past year+ could have been one big bull-flag, but we'll cross that bridge if it ever needs to be crossed.

Looking at the shorter-term daily chart, relative weakness aside, the trend structure is sloppy, but smacks more bear than bull with a sequence of lower lows and lower highs in place.

DAX (Ger30) Daily [Weekly]

Yesterday, the DAX managed to recapture the June 16 low, but if we dial in even closer to the intra-day time-frame we can see there is a reaction zone in the ~9640/80 vicinity, which it challenged this morning. A move above there will bring the May bottoms into play in the 9730/820 zone.

2-hour

Traders will want to take note of how price action behaves around these reactions zones for clues as to whether the bounce in the DAX is likely to fizzle out, or whether a larger rebound should be expected.

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---Written by Paul Robinson, Market Analyst

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