The German DAX index, pressurised by heavy falls in German bank shares, has now ‘filled’ one of its previously unfilled gaps at around 9770. This level also roughly corresponds with the 38.2% Fibonacci retracement of the upswing from this year’s low of 8700. If the DAX manages to find significant support at this relatively shallow retracement level then it would bode well for the bulls as it would strongly suggest that they rather than the bears are still in control. But for the bullish trend to have any chance of resuming soon, the index will need to break above Thursday’s high at around 9920, a level which also corresponds with the 50-day moving average and the backside of the support trend of the bullish channel. A potential break above it would therefore re-establish the bullish channel.
Supporting the bullish argument is the fact the index had already formed a false break reversal pattern when its stay below key support around 9340 was short-lived. So, this recent correction could just be a normal pullback in an upward-trending market. What’s more, the RSI has now moved significantly away from the “overbought” levels and is holding above 40, a level which is considered the line in the sand as far as momentum is concerned.
However, if the DAX closes Friday’s session below the 9770 support level then it would more or less confirm the breakdown of the bullish channel. In this potential scenario, a deeper correction towards the previous key support at 9340 would become a likely outcome, for this hurdle also loosely ties in with the significant 61.8% Fibonacci retracement level. Supporting the bearish argument is the fact that the long-term downward-sloping trend line is still intact while the 200-day moving average is not only above the current index levels but it is also pointing lower.
So what you are looking at is effectively a range-bound market, but with well-defined tradable levels. Overall, I still feel the bulls are in control and therefore expect to see a rebound soon. My long-term view would turn bearish only if and when the index breaks below 9340 again, although a close sub 9770 support would also make less confident about the near-term outlook.
DAX Daily Chart