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DAX Rolling Over, but Will the Developing H&S Top Become a Reality?

DAX Rolling Over, but Will the Developing H&S Top Become a Reality?

What’s inside:

  • DAX rolling over in recent days brings H&S top one step closer to reality
  • Still need a break of the neckline for confirmation
  • Proximity of neckline to April gap makes set-up especially appealing with neckline trigger

Find out what’s driving the DAX and other global markets in our Q3 Forecast.

On Friday, we were discussing a potentially bearish path for the DAX via a head-and-shoulders topping formation. To end last week, the German index was trading at a resistance zone beneath 12700 created back in May and June, and it made for an ideal spot to look for the right shoulder of the pattern to develop. The past couple of sessions we have seen fairly aggressive selling from noted resistance, pushing the DAX below a minor zone of support surrounding 12500.

The pattern is maturing but not to the point of becoming official. Head-and-shoulder tops are often called out by many participants long before they mature; some of those trigger (trade below the neckline) while many others don’t. Aggressive traders will short on the turn lower from what is perceived to be a right shoulder and add to their position on a neckline break, while the textbook way to enter is to wait for a clean break of the neckline before establishing a position. An even more conservative approach is to wait for the first retest or bounce once the neckline is broken.

At any rate, the pattern is about 80% of the way towards coming to fruition, but we aren’t there yet. An appealing aspect to this set-up is the proximity of the neckline to the April French-election gap. Confluence between the two suggests we will see a thrust lower should the H&S top trigger by trading below the neckline and into the gap. A gap-fill was a scenario we were leaning on previously with the DAX trading just above it, perhaps on the current move lower since last week we will see it finally fill, and if the topping formation goes full-circle then the gap-fill will only be a potential stopping point along the way. The height of the pattern points to a move towards 11700/600. We’ll delve further into targets once relevant.

For now, we’re in wait-and-see mode as a potentially clean set-up works its way from scenario to reality. It’s entirely possible we will be discussing alternate paths, bearish or bullish, should time pass without seeing the neckline break. Stay tuned…

DAX: Daily

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---Written by Paul Robinson, Market Analyst

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