Equities 4 minutes to read

Dax remains in an overall downtrend

Kim Cramer Larsson

Technical Analyst, Saxo Bank

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.


I am often asked what the German Dax index will do next. Over the past couple of days, of course, the German benchmark seems to have rebounded in line with most global stock markets after last week’s massive sell-off. But where are we headed now?

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.
Source: Saxo Bank
Is it all over, though? Might we even be poised for a year-end rally?

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.
 
Source: Saxo Bank

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