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DAX Bouncing, but Has Work to Do to Turn Outright Bullish

DAX Bouncing, but Has Work to Do to Turn Outright Bullish

What’s inside:

  • DAX bouncing with risk, weaker euro (a correlation which might breakdown)
  • But has plenty of resistance ahead to keep it going
  • Choppy, indecisive trade could dominate

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Since Tuesday morning when global markets initially reacted lower on North Korea’s launching of a missile over Japan, we’ve seen the market view weakness as a buying opportunity. The DAX broke down to its worst levels since March, but has rebounded a bit. The breakdown came from a triangle pattern we were discussing as likely to lead to lower prices, but selling from the formation has proven to be a one-off event thus far.

While the market broke below an earlier-month swing-low on an intra-day basis, the break was somewhat recovered for a closing print just above the support threshold. So far the bounce is being driven by not only a broad rally in risk but also with the help of a weaker euro. The negative correlation between the DAX & euro(trading in opposite directions of one another) has been significant, with the one-month correlation reaching below -90% during both July & August. It’s also been the longest stretch of inverse correlation since the end of 2015, very beginning of 2016. Correlations are relationships which can fall in and out of love with little warning, and on that, while it is generally true the euro and DAX trade inverse to one another to one degree or another, risk is rising that the two could trade together at some point in the not-too-distant future. Bottom line, don’t get married to the correlation, but simply keep it in mind.

Turning to the techs-only, the DAX is nearing a trend-line running off the June record high and ‘head’ of a ‘head-and-shoulders’ formation which has acted as a technical guide for much of the past month. The trend-line is first up for the market to conquer, but even with a breach above we will need to see the area around 12300 overtaken to put wind in the sails for longs. That’s still quite a fair amount of distance away. Renewed weakness will bring back into play the weekly low at 11868 near the March low at 11850. Below there, not a move anticipated to take shape at this time, we could finally see the market trade down to the measured move target of the H&S formation near 11600 and an actual level of support around the 11480-mark.

All-in-all, the DAX doesn’t appear poised to fall out of bed, but the top-side doesn’t yet look very encouraging. From a tactical standpoint, sluggish price action could continue to dominate as the market sorts itself out, and remaining highly flexible in both directions to then be the most prudent approach.

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.