Cyclical stocks sniff out better times ahead

• DAX breaks to fresh record highs
• ASX 200 clears late July resistance
• Russell 2000 snaps month-long downtrend

DAX, ASX 200 and Russell charts align

The German DAX, Australia's ASX 200 and Russell 2000 in the States don't have much in common. Different economies, different sector weightings and different domestic drivers. Yet over recent sessions, the price action has started to look remarkably similar.

The DAX has broken to fresh record highs, the ASX 200 has pushed above the highs set in late July, while the Russell has broken above the downtrend that's capped rallies over the past month.

As anyone who's watched them for a significant period can attest, markets don't wait for economists or data to tell them the outlook is changing. They often move first. Looking at these charts together, it feels like they're starting to price a brightening macroeconomic picture.

Maybe it's the recent slide in energy prices on what feels like eternal Middle East peace hopes. Maybe it's the view that the recent intervention episode to support the yen has reduced one of the risks that had been building in global bond markets. Maybe traders think the highs are in for inflation. Or maybe it's something else like the return of liquidity post month-end. 

Whatever the reason, it's difficult to ignore that these cyclical plays are starting to behave in a similar fashion. While it could prove to be yet another false dawn, when the charts start lining up like this, it’s worth paying attention.

DAX breaks to fresh record highs

Source: TradingView

Germany's DAX has broken to fresh record highs after clearing resistance at 25,923, extending the bull move that's been building since the rebound from 24,600. The breakout above 25,275 and subsequent backtest added conviction that buyers remained in control.

The broader technical picture continues to favour upside. The price trades above rising key medium and long-term moving averages, RSI (14) is pushing higher at 66 without being overbought, while MACD has staged a bullish crossover and continues to strengthen in positive territory.

The setup therefore favours bulls. I just don't see enough to justify chasing fresh record highs right now.

For one, the last break to record highs earlier this year fizzled quickly. Secondly, the macro backdrop may prove just as important as the technicals when it comes to the breakout's longevity.

Germany remains heavily reliant on imported energy, meaning the recent slide in crude oil prices on hopes of a lasting Middle East peace deal has provided a near-term tailwind. But whether it lasts, or simply proves to be another false dawn in this ongoing geopolitical saga, may determine whether this breakout sticks.

While some may be prepared to buy the breakout immediately, I'd rather wait for a backtest of 25,923. If former resistance flips to support, it would provide far greater confidence that this is a genuine breakout to chase.

At record highs, trying to pick an upside target feels like guesswork. Instead, I'll be watching for reversal patterns on the daily timeframe, such as a bearish engulfing pattern, shooting star, evening star or key reversal, as an early warning that the bull move may be running out of steam.

ASX 200 bulls eye record highs

Source: TradingView

While the ASX 200's price action isn't always the cleanest, it's obvious the bulls are winning the battle right now.

The index has rebounded strongly from 8,900, a level that's acted as both support and resistance over recent weeks, before surging above 9,063 today. That follows several failed attempts to clear the level last week, adding to confidence that buyers are finally regaining control.

The oscillators are also on board. RSI (14) sits at 63, still short of overbought territory and pointing to building upside momentum, while MACD has staged a bullish crossover and continues to diverge from its signal line in positive territory.

Like the DAX, some may be prepared to buy the breakout immediately. Given the risk of another escalation in geopolitical tensions that could quickly challenge the narrative, I'd rather wait for a backtest of the former resistance zone between 9,063 and 9,100. The area attracted plenty of price action late last year and again in recent weeks, making it an important zone to watch. If it flips to support, longs could be considered with a tight stop below 9,063, targeting a retest of the record high at 9,226.4.

Russell 2000 joins the breakout club

Source: TradingView

The Russell 2000 broke above the downtrend that had been in place since the start of July on Monday, clearing the 50-day simple moving average in the process.

Again, some may be prepared to buy the breakout immediately. I'd rather wait for a pullback towards 2,960 or the 50-day simple moving average before considering entry. If either holds as support, longs could be considered with a tight stop beneath those levels for protection, targeting a retest of the record high at 3,047.5.

The broader technical picture continues to favour upside. The price trades above all the key medium and long-term moving averages, RSI (14) has shifted back above the neutral 50 level. That view is confirmed by MACD, which has staged a bullish crossover of the signal line and is now moving into positive territory.