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DOUBLE TOPS


German DAX Index Forms Double Top Near Key Retracement

05/19/04 04:00:50 PM
by Arthur Hill

After almost doubling since Mar-03, the German DAX Index ran into a wall of resistance and formed a potential bearish reversal pattern.

Security:   $GDAXI
Position:   Hold

The advance from 2188 to 4176 (Mar-03 to Jan-04) looks strong by itself, but pales when considered in the context of the prior decline. The index declined from 5467 to 2188 (Mar-02 to Mar-03) and the current advance to 4176 recouped around 62% of that decline. This Fibonacci number (61.8%) has a strange habit of marking important reversals and traders should be on guard for a bearish reversal pattern.

Graphic provided by: MetaStock.
 
As the 62% retracement foreshadowed, the index has run into resistance around 4175 over the last four to five months and a double top is brewing. These are potential bearish reversal patterns that require confirmation with a support break at 3692 (green arrow). Confirmation of the double top would project further weakness to around 3200 (4176 - 3692 = 484, 3692 - 484 = 3208). This projection is confirmed by a 50% retracement of the most recent advance and the October low (blue arrow).

The top indicator is MACD with the MACD Histogram shown just below. The MACD histogram measures the difference between MACD (blue line) and its signal line (magenta line or the 9-day EMA or MACD). The MACD histogram is positive when MACD is trading above its signal line and negative when MACD is trading below its signal line.

The MACD histogram formed a bearish divergence before turning negative in late Feb-04 (red arrow). This bearish divergence foreshadowed a move by MACD below its signal line and momentum has been deteriorating over the last few months. As long as MACD remains below its signal line (MACD histogram below zero) and trending lower, a bounce off support is unlikely.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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