With DAX having risen to a pivotal zone of resistance, we highlight two clear scenarios worth monitoring.
As highlighted by my colleague Matt Weller, indices are locked within a range whilst they await the catalyst for their next directional move, and the DAX is no exception.
The past 7 sessions have seen the index confined to a 320 point range, although it can be argued this is part of a 600-point range it’s been confined to these past three weeks. Either way, global equity markets have paused for breath which means we should be headed towards range expansion (and therefore, hopefully a breakout).
At current levels, the DAX is of interest for two potential scenarios.
1) Resistance holds and it rolls over, back within range: A zone of resistance around 11,810 – 11,865 has proven to be pivotal, and prices are trading just beneath it. Taking into account that a new bearish trend is underway since prices broken beneath the 12,172 low, and the leg lower was seen on strong momentum, bears could look to fade into minor rallies below resistance. This allows them to trade short at the high of the range, or position themselves near the end of a correction, and anticipate a break beneath the 11,266 low.
2) Prices break resistance and confirm an inverted head and shoulders pattern: Switching to the four-hour chart, we can see the pattern more clearly which would be confirmed with a break above 11,865. If successful, the pattern project an initial target around the 12,473 high. Although we’d expect a price reaction around the 12,115 gap, which makes it a likely interim target.
With economic data looking quite light for Europe, it will likely be trade developments which move markets, assuming they do at all. Therefor, if the inverted H&S is to be confirmed, it needs to be fairly soon or else it will morph into new pattern. And if no catalyst arrives, scenario one may be the better choice as it allows bears to short a technical play and trade within the range, until a market-moving event comes along.
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