Kim Cramer Larsson
Technical Analyst, Saxo Bank Group
Summary: The Dax index appears seems to be have broken its near-horizontal neckline in a shoulder-(dual) head-shoulder formation, demonstrating that its recent recovery doesn't tell the whole story.
There is no such thing as certainty in financial analysis; what we look at are the possibilities. We look to find patterns that might repeat themselves. Taking a closer look at the Dax, and focusing on the time period where the downtrend accelerated this past summer, there seems to be a repeated pattern in place where corrections occur.
Every sell-off is followed by a correction up to around 0.618 or 0.764 retracements. If that pattern repeats itself, we could expect a correction taking DAX up to around 12,075 which is the 0.618 retracement.
Dax daily chart
Here we see a sell-off after a double-top pattern – the right shoulder on the weekly chart – followed by a 0.764 correction. The next sell-off was followed by a 0.618 correction. The next one after that was followed by a 0.764 correction before the most correction.
Hardly. Or at least it hardly seems that way when we look at the bigger picture I first discussed a few days ago (and a few weeks ago before that).
Well that’s when we look at the bigger picture I posted a few days ago (and a couple of weeks ago before that).
The Dax seems to be have broken the near-horizontal neckline in a shoulder-(dual) head-shoulder formation. The index broke the neckline last week, finding support at the 200-week moving average and is now trying to crawl back above. This is called a pullback, and pullbacks occur in roughly half of all bearish pattern breakouts.
A correction to 12.075 will take the index back above the neckline, but that doesn’t mean the pattern is broken. We would need a much bigger comeback before saying that.
We can discuss that if and when the Dax breaks 12,500!
The Dax index is in a de facto technical downtrend on the daily and weekly charts, and on the monthly as well. If we close below this week’s low, brace yourself... further downside is very likely.
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