DAX Likely To Tumble?

07/22/10 02:30:48 PM

by Chaitali Mohile

The German DAX Composite has reached a make or break situation.

Security: $DAX
Position: N/A

After many volatile sessions, the German DAX Composite ($DAX) is once again retracing towards an ascending trendline support. The ascending trendline signifies that the $DAX is forming a higher bottom. However, the three peaks revealed a bearish reversal story. On the chart in Figure 1 the support line resembles the neckline, the highest top is the head and the other two are the left & right shoulders. Therefore, a short-term head & shoulder pattern is being constructed on the daily time frame of $DAX. The recent bearish rally has moved much closer to the 200-day moving average (MA) support which is marginally above the neckline. However, the weak average directional index (ADX) and the equal pressure from the buyers and sellers would challenge both the support lines.

FIGURE 1: $DAX, DAILY.

Graphic provided by: StockCharts.com.

The declining full stochastic (14,3,3) shows diminishing momentum. The oscillator is forming a head & shoulder top pattern as well. The highlight in Figure 1 is that the price has not breached the 200-day MA support in the past six months and the stochastic oscillator was not oversold for a long time. The indicator sprang immediately from the 20 levels. Hence, we would closely watch a confirmed bearish breakout below 5800 levels. If the breakout occurs, $DAX would plunge to 5300 (6300-5800=500-5800=5300)

FIGURE 2: $DAX, WEEKLY.

Graphic provided by: StockCharts.com.

In Figure 2 I have added 40-week MA to the weekly time frame to understand more about the support-resistance of $DAX. After a bullish crossover of the 40 and 50-week MAs, both the supports converged and ascended. The index has been rallying with the support of the two MAs and under the resistance of 200-week MA. The stochastic oscillator is moving with the support of the center line. Since mid 2009, the MA supports were very well respected by the index. In such a scenario, $DAX would not breach the 40 and 50-period MA supports.

Thus, $DAX is unlikely to break the head & shoulder pattern downwards. The index is likely to sustain above the support levels.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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HEAD & SHOULDERS

DAX Likely To Tumble?

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