DAX Market Analysis, August 2020

DAX Market Analysis, August 2020

13 August 2020Reading time: 4 minutes

July turned out to be quite an interesting month for DAX - monthly candle formed a classic topping tail, i.e. a candle with long wick above - a typical formation indicating market pressure to sell. DAX does not appear as strong as it was e.g. a month ago, and technically it seems to be weaker than the S&P500 index in the USA.

DAX continued the upleg from June in early July but in the 3rd week of July, when DAX tested 13000 points (which was also monthly R1 pivot), the index started a pullback back to monthly pivot point - a scenario we described as a possible one in our June market analysis. This movement is nicely visible in the weekly chart which is below the monthly chart view. This was yet another good example of the importance to follow pivot levels.

It appears that market sentiment is influenced on one hand by company results and on the other by the interest rates that are expected to remain effectively at zero / very low levels for a long time. Then there are the concerns on how COVID-19 pandemic evolves e.g. in USA, Great Britain and Brazil as well as a possible second wave in countries that are now less impacted, leading to further lockdowns and restrictions (which we have now started to see). When the government bonds offer no return for investors, it is natural that capital flows into instruments that offer possibility for gains, which continues to support the stock market. When possible negative COVID-19 news emerge, investors can react negatively and sell their positions at least on short term. On top of this the US presidential election is approaching, another possible source for volatility. So this type of situation can potentially result in higher than usual volatility, which is good for short term trading.

Technically speaking, DAX is now fully in bullish mode as the Exponential Moving Average EMA6 in monthly chart (below) crossed above EMA12 - in this situation it is typically safer to look for entry points for long positions. However the long tail/wick in July’s monthly candle is a possible warning sign and we recommend even more caution that normally. One quite possible scenario is that we see another test at 13000 level (August monthly R1 pivot is at 13053) and if that happens, a good idea is to wait and let the market show which way we head from there. Next resistance level above 13000 is close at 13300. Higher than normal volatility could also mean fast moves up and down which then return close to the levels where they started from.

Long term support levels on monthly chart: 11300, 12350
Long term resistance levels on monthly chart: 13300

DAX Weekly Chart below with monthly pivot levels. Also here DAX is clearly in bullish mode and this chart also shows well how in July the index tested 13000, followed by a rebound downwards, and now further steps up in early August. If DAX turns downwards from current levels then in our opinion the monthly pivot point at 12574 is a key level to follow. DAX should stay above it to keep a bullish view valid. If the index drops below it, also weekly EMA50 line has been providing support recently (currently at 12200). If that one breaks down, then the next possible level to test is monthly S1 pivot at 11843.

Medium term support levels on weekly chart: 11800, 12300, 12580
Medium term resistance levels on weekly chart: 13050, 13400, 13800

For a long trade, the monthly pivot is at 12574 and weekly EMA50 at 12200, both possible levels of support, the knock-out should be clear below these levels for a long/call trade.

For a short/put position - we think it is important to have knock-out above level 13200 as DAX can very possibly test this area before turning downwards.

Investors’ sentiment in USA has not changed significantly, investors with bullish view has continued to decline.

Historically, August has been the worst month for DAX.

Above: Percentage split of shares in DAX index between those above and below their respective DMA20 averages. Most shares are now below their DMA20 which has historically meant two possible things: a) share is bottoming out and ready to go up again or b) further drop downwards is expected over next 4-8 weeks. So quite confusing picture, careful trading with smaller positions is a good way to tackle such environment.

McClellan oscillator is at levels where DAX started a leg upwards on June 15, 2020 as well as May 14, 2020. However, MA10 is below zero which has been also a starting point for major legs downwards. So also here, picture is mixed.

Above: Summary of technical indicators for shares in DAX index: picture is so mixed up that this view has no value at the moment.

Above: Average historical daily and weekly changes for DAX.

Above: Volatility in DAX was increasing in late July. This is a possible bearish signal.

World’s most significant futures: short term indicators are in ‘buy’ mode with only Daily indicators in ‘Sell’

 

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

22/10/2020 06:12:11

 

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