DAX Trading Towards Gap-fill, Break of H&S Neckline
- Post-ECB drop accelerates Friday, gap-fill likely
- H&S top to trigger on a move much lower from here
- Will require strong bullish price action to negate current bearish bias
To end last week, we were noting DAX weakness post-ECB with the help of the euro continuing to bulldoze its way higher. The euro has been weighing on European stocks, but sharp event-driven moves really highlight this inverse relationship. The Thursday intra-day drop turned into a material down-day on Friday, which pushed the German index into the gap created following the first round of the French elections. We’re very near triggering the H&S topping formation, too, with price thus far today trading below the neckline. It’s all about the daily closing print below, though, to avoid fake-outs. A close below the neckline, whether today or a couple of days from now, is a likely scenario with the DAX still sitting over 150 points away from filling the gap.
The gap-fill is the first form of support, and below there the next level of price support comes in around 11941, the April low. The March low at 11850 could be of minor significance, but we’ll be placing more emphasis on the 200-day which currently clocks in just over 11800. Turning to the ‘textbook’ way of deriving the target once an H&S pattern triggers, the ‘measured move target’ clocks in at around 11645. It’s simply calculated as the distance from the head to the neckline subtracted from the point where price breaks the neckline.
What would take the bearish scenario off the table? First-off, given the DAX is trading in a major gap, to reiterate, probability favors this air pocket getting filled before finding any real support. In that case, as stated earlier, the neckline will have been broken and we’ll have our topping formation confirmed and down-move well underway. If the move lower is to be cut short we’ll need to see bullish price action at one of the beforementioned support levels. A big reversal and follow-through to the top-side will need to develop. If the DAX were to not fill the gap and hold right around current levels, we would still need to see a strong shove higher which negates the bearish trend in place since the peak in June.
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---Written by Paul Robinson, Market Analyst
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