DAX Chart Outlook – Weakening Posture Could Bring LT T-line into Play

DAX TECHNICAL HIGHLIGHTS:

• DAX broke lower parallel of month-long channel
• Underwent sharp reversal yesterday on test of lower parallel
• Price sequence bearish, but need to wait for trigger

Last week, the DAX broke the upward channel from the late-June low, which as we noted in the weekly forecast over the weekend, puts the index in a semi-precarious position. Yesterday, the market attempted to trade higher, but once it nearly filled the 8/2 gap a sizable rejection ensued, keeping pressure on.

The price structure on the short-term time-frame (hourly chart) is carving out a head-and-shoulders pattern, and while not possessing the most symmetrical properties it’s good enough should it trigger. That is, price needs to decline below the neckline of the pattern before it can be considered validated.

Last week, we saw a textbook example with the S&P 500 as to why these technical patterns require a confirmed break of the neckline before we can run with their downward bias. The neckline is considered support until it’s broken, and as it turned out with the SPX no break of support meant no short which meant no losses on fresh shorts in anticipation of the pattern following through. Which turned out to be a good ‘no break’ as the S&P used support to springboard higher.

With that said, a solid break through the neckline is needed before a bearish bias can gain momentum. In the event of a breakdown, we could be quickly looking at the February 2016 trend-line, currently residing in the high 12200s. No break, then no trade.

At this time, the market is pushing higher and may attempt to leave behind the possibility of an H&S formation. Ahead, though, the 200-day (which acted as resistance back on 7/18) and a recapture of the lower parallel will be needed if more upside is to be seen.

DAX DAILY CHART (CHANNEL BROKEN)

DAX HOURLY CHART (HEAD-AND-SHOULDERS PATTERN)

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