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A Major Breakdown For The DAX

01/31/08 08:30:00 AM
by Arthur Hill

The German DAX Index held out longer than most, but finally succumbed to the bear with a breakdown and major trend reversal.

Security:   $DAXI
Position:   Sell

Figure 1 shows monthly bars for the DAX and the last 12 years of trading. The index peaked in March 2000, bottomed in March 2003, and peaked again in July 2007. The advance to the 2007 high recouped the entire loss and met resistance from the 2000 high. This is a mighty resistance level for the index.

FIGURE 1: DAX, MONTHLY. The index peaked in March 2000, bottomed in March 2003, and peaked again in July 2007.
Graphic provided by: TeleChart2007.
The blue trendline extends up from the August 2004 lows and has been touched at least three times. It takes two points to draw a trendline and one more to validate it. With the decline over the past week, the index broke this trendline and a big trend change is afoot.

Figure 2 shows weekly candlesticks. The index hit resistance in July 2007 and then consolidated for the next six months (July to January). The DAX held this consolidation while other stock markets fell apart but could not take it any longer last week and broke support with a big gap. This breakdown reverses a long uptrend and starts a new downtrend.

FIGURE 2: DAX, WEEKLY. Here, the index hit resistance in July 2007, then consolidated for the next six months (July to January).
Graphic provided by: TeleChart2007.
Momentum confirms the breakdown. The moving average convergence/divergence (MACD) turned flat from October to January and the indicator is on the verge of turning negative. The MACD peaked in July when the index was strong. As trading turned flat in the index, the MACD moved back to the zero line and moved sideways. There was no upside momentum so the MACD hovered around the zero line. A move into negative territory and below prior low would turn momentum bearish and likely coincide with another drop in the index.

Arthur Hill

Arthur Hill is currently editor of, 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 and the main contributor to the ChartSchool.

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