DAX Technical Outlook: Bulls Hamstrung by Euro, May Soon Change
- Euro rally hampering DAX strength, may soon change
- Seen similar scenario before, euro pausing may be enough to help market
- Notable technical levels, lines to keep an eye on
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The strong euro rally the past few days has dampened upward momentum on the DAX and other European indices influenced by the pull of the single-currency. Prior to the surge, the German benchmark looked poised to trade to new record highs.
There is reason to believe, though, that EURUSD may find it difficult to sustain momentum in the days ahead as it looks to have gotten ahead of itself; could this be enough to allow the DAX to finally notch a new record? There has been an interesting relationship change between the DAX & euro which we’ve seen before get corrected.
While the very short-term (1-week correlation) has been solidly negative, the 1-month correlation between the DAX & EURUSD just turned positive for the first time since late-October, and when it did such back then, it lasted only a couple of days before reverting to its typically strong negative reading. Prior to that, it’s happened on a few other occasions, but only relatively brief periods of time.
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Chart – DAX: Daily
DAX, Euro correlation in lower pane turned positive, but may only be temporary like before. Market still holding onto most of rally from Jan 2 low, could soon challenge monthly high if support holds.
It’s interesting to note that during the last turn positive in the correlation, the euro had made a strong move lower which helped bolster the DAX to new record highs. Shortly after the swift down-move in the currency, momentum in stocks stalled and reversed forcefully lower. We may be in for a similar scenario, but in reverse this time.
The thinking on this end, is that the euro could soon begin a consolidation period or worse, and it’ll be enough to at least give European equities breathing room to trade higher. In terms of support, we’ll start with last week’s low at 13151, and from there trend-lines extending higher since last year.
On the top-side, there is resistance at a trend-line off the record high, followed by the monthly high at 13425. If the market can get into gear above the second threshold, it’s only a 100 points to the prior record at 13525.
---Written by Paul Robinson, Market Analyst
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