DAX Faces Test After Failing to Maintain Breakout

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What’s inside:

• The DAX breaks out of bullish pattern, but finds sellers

• Still stuck within a range, rising channel may help support

• Keep an eye on the CAC 40

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On Tuesday, we discussed the bull-flag configuration taking shape in the DAX and the likelihood of this leading to higher prices. In yesterday’s session, the market started lower but then rallied strongly to take out the top of the recent consolidation pattern at 11637. The push higher quickly brought into play the first top-side level on our radar at 11670, the August 2015 swing high. The market was unable to hold above this level (high = 11692) and closed the day just above the Jan 3 breakout point.

Today, we are seeing the DAX drop back into the middle of the consolidation pattern, which presents the risk that we are seeing a valid rejection upon an attempt to break higher out of a bullish pattern. It’s too soon to become outwardly bearish, but this price behavior does give pause to the bulls at the moment and could become meaningful if downside levels are taken out.

There is a lower parallel coming into play around current market prices, keep an eye on this as the first level of support. If slope support fails, then in order to at least keep the recent consolidation phase in play the DAX should hold around the 11525 level, and if not, look for the top of the digestion period from the end of the year to act as support around 11480. A break below 11480 would quickly bring in the Jan 2 low at 11414 and bottom end of the consolidation which led to the rally to start the year. At that point the sequence of rally, consolidate, rally, would be completely broken and a sign of developing trend change, even if only for a short period of time.

Taking a look at the highly-correlated CAC 40, it’s on the verge of breaking down out of a consolidation pattern similar to the one built since last week in the DAX; a breakdown would also put the French index in position to threaten the monthly low created on Jan 2 at 4844. It’s a development worth keeping an eye on.

But before we focus too much on the downside, the reality is that the DAX is neither here nor there as it trades at levels seen back on the first day of the year. As long as we remain in the confines of 11525 to 11692, the market will be choppy and the broader trend higher should still be given the benefit of the doubt as an extended range develops.

DAX: Daily

DAX Faces Test After Failing to Maintain Breakout

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---Written by Paul Robinson, Market Analyst

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