Technical Analyst, Saxo Bank
Summary: An SHS pattern that began to emerge in the DAX in early September is now coming into much sharper focus. What's more, several technical indicators suggest that things could get worse from here.
Some weeks ago it became apparent that an S-H-S pattern in the DAX seemed to be unfolding:
Medium term, next couple of months, weekly chart – as of 11.09.2018:
Taking a closer look at the weekly chart an interesting scenario could unfold. Not only has the DAX broken bearishly out of a triangle-like pattern but the index is close to confirming a Shoulder-Head-Shoulder (SHS) pattern – not a straightforward SHS as it has two heads but nonetheless an SHS pattern. (The head was actually a double top which was concluded in Q1 2018 when dipping below 12.000). Another little caveat is that the neckline is sloping downwards. An SHS pattern with a downwards sloping neckline usually performs worse than an upwards sloping neckline, i.e. if breaking the neckline the drop could be of less magnitude – it has already moved most of the way AND if dropping down to test the neckline the 200-week moving average will act as a support which could be around the 11.500 level.
Update as of 11.10.2018:
That’s more or less where we are now. As can be seen from the weekly chart there is not much strong support before around 10.800. So it can get much worse. The 10.800 would be the minimum target for the S-H-S formation.
However, in the short term we could see some rebound. It is not unusual to see pullbacks where the market retests the neckline from beneath before the next likely sell-off. RSI and MACD are bearish with no divergence so all indicators are pointing lower. Bollinger® bands are expanding, indicating the initial stage of a (medium-term bearish) trend.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
