Market Analysis

Draghi’s DAX Problem

Oh he’ll never admit it of course, but let’s face reality: The ECB cut its QE program in half In January and European stocks have never been the same. It’s almost as if stock performance is somehow influenced by how much artificial liquidity is being pumped into markets.

But this is not the point of the article, rather I want to highlight some technical considerations for the $DAX in particular as I see some interesting patterns emerging.

Following the hard early 2018 drubbing of the $DAX beginning last Friday I started tracking a positive divergence on the daily $DAX chart on twitter:

I’ve outlined what I need to see for this pattern to confirm, but it could suggest some short term bullish action may be in play for the $DAX in the days and perhaps weeks ahead.

But note that whatever rally is coming better be strong, really strong, or $DAX is at risk of placing a majorly bearish pattern:

That’s right. We could rally 1,000 points here and it could be bearish. Note $DAX printed a double top between October and January following what appears to be a very pronounced left shoulder in the summer. Any rally from here risks the building of a right shoulder. If lows were to then break following such a right shoulder, $DAX would be at risk for a massive summer/fall correction taking it down 25% off of the highs into the 10k area if the pattern triggers.

Draghi has yet to prove markets can handle an intervention free environment. This year’s immediate headache is that the Euro has been rallying against the dollar, which makes European goods more expensive in America:

That’s impacting growth. But if you print 30B Euro a month and your currency still goes up and stocks drop your growth narrative gets cramped.

Sounds like a problem.

But the H&S pattern above is speculative. What is not speculative is this:

Recent highs all came on long term negative divergences. $DAX has strong support along the 2009 trend line and the monthly 25 MA should price revert lower, but break below that and the next trend line comes into play which ironically matches the 10K H&S target outlined above:

Perhaps the quarterly chart highlights the issue better than any other chart:

This recent decline was not an accident, it’s simply a consequence of the negative technical program that’s been forming over a long period of time. And currently that program plays very similar to the 1998-2000 time frame. I can’t suggest it will continue to play this way, but if it does, $DAX may have a very nasty bear market in its future possibly tagging the .618 fib in the years ahead.

So Draghi has a $DAX problem. Even a 1,000 point rally from here is not enough, it may just set $DAX up for a heads and shoulders pattern. No, Draghi needs $DAX to make new highs or these charts suggest that his growth narrative is about to die.

We’ll know more this summer, but these charts outline some of the risk pivots for consideration.

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