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Featured chart 24 July: DAX breakdown completes head and shoulders top

CMC Markets

After rallying through the first few months of 2017, the DAX ran out of steam in May and has been forming a top for over the last two months.

The index has been turning increasingly downward, recently completing a head and shoulders top to suggest the start of a new downtrend.  This comes at a critical time with a number of earnings reports from key German companies due this week. 


As with other major indices around the world, the Germany 30 (which tracks the DAX index) came under accumulation following the US election, and steadily trended upward into May. 

For the last two months, however, a transition from accumulation to distribution has been underway. A bearish head and shoulders top pattern formed. A negative RSI divergence coincided with the head of the pattern and the RSI has continued to trend lower since then, a sign of slowing upward momentum. 

On Monday, the index broke down below 12,240 completing the pattern and also completing a 23% Fibonacci retracement of its previous uptrend. On top of these bearish signs, the index has started to fill in a breakaway gap left behind by an April rally. With former neckline support becoming resistance a new downtrend appears to be underway. The RSI under 50 and falling confirms increasing downward momentum. 

Potential downside support levels appear near 12,090, the bottom of the gap currently being filled in, the 12,000 round number and 11,800 where the 200-day average coincides with a 38% retracement of the previous uptrend.  


This breakdown comes despite the IMF having just upgraded its 2017 GDP growth forecast for both Germany and the eurozone. As a result, the main factor driving the decline besides general exhaustion in stocks may be stocks reacting to the higher euro. Many German companies are big exporters (particularly Germany automakers) and sentiment toward them may be impacted negatively by the rising Euro, a relationship we often see in the Nikkei and more recently the FTSE. 

There are a number of big German companies reporting this week which could impact trading in the Dax including BASF, Deutsche Bank, Bayer, and Volkswagen. 


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