Technical Update - DAX extending uptrend likely to cancel top and reversal pattern
Kim Cramer Larsson
Technical Analyst, Saxo Bank
DAX is extending uptrend and is likely to cancel top and reversal pattern despite showing divergence on RSI. DAX is eyeing 14,654 possibly higher.
After several days of testing the key level at 14,440 only to close below DAX has opened above today. If DAX closes above 14,440 it will have cancelled the Evening Doji top and reversal pattern formed last week, and DAX is likely to move higher to resistance at around 14,654. However, DAX could extend the uptrend to 14,900.
The uptrend is stretched however, with RSI showing divergence (see RSI divergence explained below). If RSI closes above 80.90, indicated by the red horizontal line, it will have demolished the divergence and DAX is likely to extend uptrend to around 14,900.
If DAX slides back and closes below 14,440 today the index will most likely have exhausted and a reversal should be expected. If that scenario plays out we are likely to see RSI closing below its lower rising trendline adding to the reversal picture.
Bottom line is that the trend is your friend and for now the uptrend is intact but with a warning sign in the form of RSI divergence.
RSI divergence explained: When instrument price is making a new high/low but RSI values are not making new high/low at the same time. That is a sign of imbalance in the market and an weakening of the uptrend/downtrend. Divergence or imbalance in the market can go on for quite some time but not forever. It is an indication of the exhaustion of the trend
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