DAX in no man's land ahead of fundamental events, sharp move likely

In my last stocks report before I went on holiday at the start of August (when we looked at both the Dow and DAX indices) I suggested that the there was a “real battle” going on between the bulls and the bears and that the outcome of that battle “could determine the direction for the next several trading days.” On the DAX, we specifically discussed the implication of price action around the 8930/60 support area. We warned that a potential daily close below there may “scare away more of the existing bullish speculators” but also pointed to the fact that the index was “extremely oversold” and that a short-covering rally was likely. As it turned out, the latter scenario has obviously played out with the US markets rallying to fresh records and the DAX reaching all of our three bullish targets (9100, 9250 and 9400).

In fact, the DAX went on to reach 9600, although it has since struggled for further upward momentum. As can be seen from the daily chart, below, this 9600 level was previously support and it also roughly corresponds with the 61.8% Fibonacci retracement level (9612) of the downswing from the June peak (10,050). While these technical factors alone are enough to make 9600 a key resistance area, the main moving averages converge around this level too, with the 50-day SMA coming in at 9550; the 100-day SMA at 9640 and the 200-day SMA at 9525. Meanwhile the RSI has been unable to break above the key 60 level despite the underlying rally in the DAX, suggesting that the overall momentum hasn’t quite shifted into the bulls’ favour yet. As a result, we may see further downward pressure over the coming days. In this regard, the key level to watch on the DAX is around 9400, which previously resistance. A potential close below here may lead to further selling pressure towards the Fibonacci support levels that are derived from last month’s upswing (see chart). However, if the index finds support and breaks decisively above 9600 then we could just as easily see a continuation of the rally towards 9800 and possibly even 10050. The 9800 mark was formerly resistance and ties in with the 78.6% Fibonacci level of the down move from the June peak of 10050.

It is possible that the index may break out of this 9400-9600 trading range as early as this week, for we have some extremely important data releases coming up (which we covered extensively in our usual weekly outlook guide on Friday). But the rest of today’s action is likely to be very quiet with the US traders away due to the Labor Day holiday. For the DAX and stock markets in general, the most important fundamental events are likely to be the ECB press conference on Thursday and the US jobs report on Friday. While the ECB is unlikely to announce any further stimulatory measures at this meeting, Mario Draghi’s speech will be monitored closely for any hints on QE, which could send European stocks soaring and the euro plunging. However if he rules it out then we may see the opposite reaction. In the US, anything above 200,000 for the number of jobs gained last month could be positive news for stocks. Meanwhile some of the other data releases that may impact the DAX this week are as follows:

• Tuesday: Spanish Unemployment Change and ISM Manufacturing PMI

• Wednesday: Chinese and European services PMIs, and Eurozone retail sales

• Thursday: German Factory Orders, ECB press conference, ADP payrolls and ISM services PMI

• Friday: German industrial production and US employment report

Given the potential impact and uncertainty about the outcome of the abovementioned fundamental events, some traders may well be looking at a straddle strategy on the DAX as a break above 9600 would technically be a bullish outcome while a close below 9400 would be bearish. But as things stand, the technical picture for the DAX looks neutral to slightly bearish, although this outlook would be invalidated on a potential break above 9600.