On August 24, I told colleagues and clients that the German Dax index could retrace to around 12,600 if that day's high (12,445) was taken out. That's exactly what it did on August 25, testing the 0.618 retracement level before being rejected and resuming the bearish trend.
The massive sell-off we saw yesterday has brought the Index close to an important support level around 12,100 which is likely to be tested; it could very well be tested today (as of this writing the index sat at 12,121).
The Relative Strength Index is again below 40, the lower Bollinger band is expanding, and the MACD signals a bear market, all indicating lower levels. If DAX closes below 12,100 there is no real support before 11.750.
If this scenario unfolds, however, it might not stop there. Looking at the weekly chart, we can see that the Dax seems to be breaking bearish out of a triangle-like formation. The medium-term rising trendline (black line) is currently broken. Will it end the week below?
Bollinger bands are expanding, indicating the initial stage of a (bear) trend, and RSI and MACD are both indicating bearish sentiment, underlining a negative outlook for the Dax.
A close below 12,100 will confirm a bear trend, i.e. lower highs and lower lows that over the next four to six weeks could take the index towards 11,000. This also means that the 200-week moving average will be tested and possibly penetrated.
To prevent this bearish picture unfolding, the Dax needs to get back above 12,900. Above 12,600 could get it back to neutral but there are currently no signs of that.