Friday, 27 April 2012

DAX Strategy

Despite being based in Asia and primarily focused on Asian markets, at times we have to look to our overseas peers to gain insight into market developments. In particular, at this juncture I see a genuine bullish turning point in the strongest European equity market- the DAX. Not only does this present a great trading and investment opportunity, but it is also of central importance to global markets I believe for the upcoming few months.

DAX Weekly:
  • Price has retested and held the key upward sloping 55 day moving average and trendline. Here I have emphasised the importance of this 55ema since the start of the bull market began in 2009 in forming both intermediate highs and key lows.
  • The sell off from the recent March high has been the first meaningful pullback and test of the 55ema since the price breakout in Jan 2012. Buying pullbacks into a clearly defined uptrend is a low risk/high reward play. Risk for the bulls is now clearly defined below 6500.
  • As is stands, price has put in a bullish reversal candle. We await final confirmation at the close of today.
  • The target for a new move higher would be up to the previous highs located at 7200 initially. There is very much the potential for a retest of 7600 but it is important to see how price reacts at 7200 first.

Weekly Bullish. Price must hold above 6500 with 6400 an outlier. The trend remains up and this "correction" should serve as a great opportunity for investors to increase exposure to this market. A weekly close below 6500 would put my scenario in Jeopardy.

DAX Daily (i):
  • Price put in a low right on a confluence of the 38.2 Fib retrace off the last major swing low, and the upward sloping bullish trendline.
  • Note most importantly that the high of the strong bearish breakdown candle on the 23rd April has been taken out. This is indicative of a climatic low and bear trap, especially when coupled with the support confluence.

DAX Daily (ii):
  • Head and Shoulders patterns are "classic" chart formations that have a very high failure rate. In technical analysis, some of the strongest trading plays are actually failed patterns. The crowd is positioned for an outcome and when it fails to materialise, the market is forced to cover with a strong squueze ensuing. A market that fails to breakdown has underlying strength.
  • The signal for a bear trap to get long is a bullish close back above the neckline. We have seen 3 consecutive bullish candles above this neckline and this is strong confirmation of a meaningful low.

DAX Daily (iii):
  • Elliott Wave count highlights the potential end of a wave 4 correction with a retest of the previous highs up at 7200 the next probable swing.
  • The key to this count is identifying the strongest momentum within the wave iii of 3 up. The recent low has formed in the previous iv of minor degree.
  • A break above 6800 in the short term should signal a new swing higher underway and likely 5th wave up.

DAX 60mins (i):
  • Dropping down a timeframe, we can see clear bullish momentum divergences coming in on the low and a strong subsequent rally. Price tried to break through key supports on 3 occasions but failed to follow through.
  • This rally has now broken out from a trend channel and the short term open gap has been filled.
  • After such a prolonged downtrend, it is likely that price will need to consolidate in a sideways like fashion between 6800 and 6600 before the next break higher ensues.

DAX 60mins (ii):
  • The DAX looks to have completed an ABC corrective pattern off the high. Note the relationships throughout the pattern which validates this most notably Wave 1=5; Wave 3=1.618 (Wave 1)
  • A move above 6800 would confirm this pattern and act as a trigger for breakout traders.

DAX 60mins (iii):
  • Just keeping things simple, we have seen 7 clear waves from the recent high. This is a corrective pattern and thus implies a new trend higher. If price trades below 6500, this invalidates this interpretation and thus this becomes a clear marker and stop loss level.

DAX 15mins:
  • Finally, we have seen a 5 wave impulse move off the recent low. This implies another 5 wave move at a minimum after a small corrective phase. I view this as evidence of a meaningful trend change and the beginning of a new move higher.

In sum, the correction off the March highs has halted right into the weekly uptrend. Buying dips into a clearly defined uptrend is the name of the game. The lower timeframes are displaying bullish price action and follow through off the 6500 low. Elliott Wave counts also point to a meaningful low and the resumption of a new trend higher. The risk to this view is a break back down below 6500.

In the short term, 6750 to 6800 is strong overhead resistance and this should cap price for the next few days, especially after seeing a clear 5 wave move up off the low. Price has also traded from low to recent high in 3 consecutive days so expect some weakness in today's trade. On the downside, there should be very strong support at 6600 to 6650 and short term traders should be looking to buy that dip. Breakouts above 6800 would confirm a new trend up into the targets below.

Targets for a new uptrend:
1) 6950 to 7000. This is an open gap target from the 4th April. Note the 61.8 Fibonacci retrace off the March highs to the most recent lows comes in at 6930.
2) 7050. Swing high and 78.6 retrace.
3) 7200. March high and major target for this move

Any break below 6500 would invalidate this bullish interpretation and short term traders should have stops under this level. Note for longer term traders there is a bullish outlier level at 6400/6350. This is the October 2009 high and the 38.2 retrace from 2012 high to September 2011 low.

Key risks to my analysis remains the EUROSTOXX and the unravelling of the debt crisis. Key support levels there remain 2250 and 2200. The latter level should be formidable.