DAX Hits Support Zone

08/30/07 11:25:46 AM

by Arthur Hill

The German DAX Index hit a big support zone in mid-August, and a break above short-term resistance would revive the long-term uptrend.

Security: $DAXI
Position: Hold

Figure 1 shows the complete advance from March to July. The DAX surged from 6500 to 8200 in four months and then declined to around 7200. There is a lot of support in this area, and the index firmed over the last few weeks. Support stems from a 50%–62% retracement of the March–July decline, the 200-day moving average, and the June 2006 trendline.

FIGURE 1: GERMAN DAX. The DAX surged from 6500 to 8200 in four months and then declined to around 7200.

Graphic provided by: MetaStock.

The 7200 level marks an important support area for the DAX, and a break below the August lows would be most bearish. Such a break would signal a continuation lower and target a move toward the next support area around 6500, which is marked by the March lows.

Long-term support has yet to fold, and I am keeping my eye on a potentially bullish setup over the last few weeks. The July–August decline formed a falling wedge, and the index broke above the upper wedge trendline last week. The breakout is largely holding, but the index met resistance at 7630 from the July 31st and August 8th highs. A break above these highs would fully reverse the current downtrend and call for a continuation of the long-term uptrend. The first upside target would be resistance around 8100. See Figure 2.

FIGURE 2: GERMAN DAX. The July–August decline formed a falling wedge and the index broke above the upper wedge trendline last week.

Graphic provided by: MetaStock.

Turn to the relative strength index (RSI) for a confirming breakout. The 15-day RSI found support at 50 in June–July and then broke down in late July. The RSI has been below 50 since late July and this level now marks resistance. A break above 50 would be bullish for momentum and this could be used to confirm a breakout on the price chart.

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.

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