The DAX Playbook

The chart with this article is a monthly graph of the German index, aka, the ‘DAX.’ The chart shows the two previous bull and bear markets. Curiously, both bear markets started in the month of March. The DAX is now in the “third drive,” which is a common technical completion pattern. If a third bear market starts from here, it suggests the possibility that a secular, uber-bull market in Germany is now over and a secular uber-bear may be about to begin.

Based on the technical pattern from the two previous significant declines, a bear market is likely to be underway if the DAX closes below the 13-ema (yellow line) on a monthly chart, with a broken multi-year uptrend line.

 Reid-DAX-2.8.16A.png

The good news is that this has not happened yet. Although the 13-ema has been violated, the uptrend line is now being tested, but it has not broken. Neither has the 13-ema crossed down below the broken trend line, which would represent the final nail in the German bull’s coffin.

The bad news, however, is three-fold.

First, the banks in Germany appear to be in trouble. Deutsche Bank (DB) is already trading below its 2009 lows and the chart looks like Citigroup (C) before the bailout. DB is also the sponsor/underwriter for at least 36 ETFs.

Second, were the bank based in the U.S., it would be considered “systemically important” and preparations would be underway to handle a potential insolvency in an orderly manner. Such a protocol is not in place in Europe, however.

Third, the DAX chart shows volume-at-price, which happens to be distributed in a symmetrical ‘2-hump’ pattern. When analyzing charts it is useful to know at what prices, historically, large numbers of buyers and sellers transacted business. These levels form persistent support and resistance lines-in-the-sand. They also act as price magnets in a downtrend, like a floor that stops a falling ball.

There is plenty of support for the DAX at 6000, which is my near term target (Support #1). That’s the immediate price magnet. But if that level does not hold, the next significant volume support is around… 2000 (Support #2).

Germans have a reputation for financial responsibility, but clearly some part of their financial system is spinning out of control. We are not hearing the word “contagion” yet… but it’s not quite March.

 www.daytradingpsychology.com (Coaching for private traders.)

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