GER40 (DAX) cash index: Top-down Technical Analysis – Special Report
March 8, 2023 12:29 pm
GER40 (DAX) cash index: Top-down Technical Analysis – Special Report
Technical analysis is generally accepted as a valid and quite key method of market analysis. This has not always been the case and there are still certain market pockets that continue to dismiss it as irrelevant. However, most accept that a proper application of technical analysis equips the participants with significant information to act upon.
A mistake usually made when employing technical analysis is to rush into the specific timeframe of interest. Day traders for example ignore longer timeframes and focus on intraday moves only. Although this process is not wrong on face value, it is more appropriate from a market perspective to cover multiple timeframes starting from the longer-term and gradually moving to the lower time periods. This process tends to be more time-consuming and understandably most traders ignore it. In this report we will analyse the German 40 (DAX) cash index, but obviously this process applies to all actively traded instruments.
Starting point: Weekly timeframe
We are starting from the weekly chart. The main aim is to find the long-term trend and key support/resistance levels. Identifying the prevailing trend is key in order to act appropriately upon the potential trends in smaller timeframes. Focusing on the GER40 index, the current price level is comfortably above the various simple moving averages (SMAs) employed while the Average Directional Movement Index (ADX) is moving higher in almost vertical fashion. In combination with the positive D+ (green line in the ADX chart) trading above its negative counterpart, this means that the market is experiencing a strong bullish trend. There are some early signs of the trend exhaustion when examining the stochastic oscillator, but given the lack of sufficient information, the current trend is assumed to continue. In addition, we have identified multiple key levels, especially the key highs and lows recorded. Table 1 presents these potential support/resistance levels that should be in the traders’ mind during the analysis of shorter timeframes.
Next step: Daily timeframe
The daily chart analysis is essential to all types of traders, whether long-term or very short-term. It offers valuable information and it is essential in understanding the prevailing market sentiment. Similar to the weekly chart, we can highlight the key highs and low points in the price action. We also focus on local peaks and troughs, as the market identifies these points as vital, and start to pay more attention to the SMAs. In addition, we start to include the full suite of indicators, including Fibonacci retracement levels.
The GER40 index continues its upwards path since the October 2 low of 11,809. The move higher has been very aggressive with European stock markets outperforming the rest of the developed-world indices. It is trading just below the highest level since February 2022, inside the recent rectangle. It remains above the various SMAs, respecting the October 13 upward trendline. This recent uptrend is confirmed by a nice series of higher highs and higher lows, but the ADX indicator appears to have lost its appetite and thus raising the bar for a potential breakout. Also, the higher highs recorded in the index are not met by a similar move in the stochastic oscillator. This increases the risk for a bearish divergence and a potential correction in the overall long-term positive trend.
Third step: 4-hour timeframe
Long-term investors would be content with the weekly and daily analysis while very short-term trades would look at the 4-hour chart very briefly before delving into the 1-hour and 15-minute timeframes. For our purpose, the 4-hour seems sufficient to understand the shorter-term dynamics, identify the key levels for potential entry and exit in the market. The GER40 index has been moving inside a rectangle since early February as the recent breakout appears to be a false one. In addition, the result of the latest price action is the convergence of the SMAs, which in our book means that an increase in volatility is potentially on the cards. Moving to the momentum indicators where, based on the ADX, the recent bullish trend appears to have run its course. The RSI is trying to stay above the 50-midpoint and the stochastic is moving lower in a vertical fashion. The bulls could potentially set up at their defense at the April 16, 2021 high of 15,512, and the busier 15,352-15,451 range, set by the 50-, 100- and 200-day SMAs.
Putting everything together
The process of examining multiple timeframes tends to be time-consuming and potentially confusing. However, it is a better way of analyzing the market and obtaining an all-around view of the developments than just focusing on one time period. The timeframes examined can be adjusted to the profile of each trader, but we believe that the analysis of the daily chart should feature in everyone’s armory. Regarding the GER40 index analysed here, we are faced with:
A bullish trend in the weekly chart that appears to be dominant despite some early signs of trend exhaustion,
Following a significant rally, the daily chart reveals a rectangle price action since early February with the ADX signaling the absence of a clear trend in the market. In additional, the stochastic is potentially opening the door for a bearish divergence, and
The rectangle pattern is pretty evident in the 4-hour chart with the overall technical picture becoming increasingly less bullish. A potential break of the 15,352-15,451 range coupled with the stochastic moving below 50 would support the continuation of the current correction.
GER40 (DAX) cash index: Top-down Technical Analysis – Special Report
Technical analysis is generally accepted as a valid and quite key method of market analysis. This has not always been the case and there are still certain market pockets that continue to dismiss it as irrelevant. However, most accept that a proper application of technical analysis equips the participants with significant information to act upon.
A mistake usually made when employing technical analysis is to rush into the specific timeframe of interest. Day traders for example ignore longer timeframes and focus on intraday moves only. Although this process is not wrong on face value, it is more appropriate from a market perspective to cover multiple timeframes starting from the longer-term and gradually moving to the lower time periods. This process tends to be more time-consuming and understandably most traders ignore it. In this report we will analyse the German 40 (DAX) cash index, but obviously this process applies to all actively traded instruments.
Starting point: Weekly timeframe
We are starting from the weekly chart. The main aim is to find the long-term trend and key support/resistance levels. Identifying the prevailing trend is key in order to act appropriately upon the potential trends in smaller timeframes. Focusing on the GER40 index, the current price level is comfortably above the various simple moving averages (SMAs) employed while the Average Directional Movement Index (ADX) is moving higher in almost vertical fashion. In combination with the positive D+ (green line in the ADX chart) trading above its negative counterpart, this means that the market is experiencing a strong bullish trend. There are some early signs of the trend exhaustion when examining the stochastic oscillator, but given the lack of sufficient information, the current trend is assumed to continue. In addition, we have identified multiple key levels, especially the key highs and lows recorded. Table 1 presents these potential support/resistance levels that should be in the traders’ mind during the analysis of shorter timeframes.
Next step: Daily timeframe
The daily chart analysis is essential to all types of traders, whether long-term or very short-term. It offers valuable information and it is essential in understanding the prevailing market sentiment. Similar to the weekly chart, we can highlight the key highs and low points in the price action. We also focus on local peaks and troughs, as the market identifies these points as vital, and start to pay more attention to the SMAs. In addition, we start to include the full suite of indicators, including Fibonacci retracement levels.
The GER40 index continues its upwards path since the October 2 low of 11,809. The move higher has been very aggressive with European stock markets outperforming the rest of the developed-world indices. It is trading just below the highest level since February 2022, inside the recent rectangle. It remains above the various SMAs, respecting the October 13 upward trendline. This recent uptrend is confirmed by a nice series of higher highs and higher lows, but the ADX indicator appears to have lost its appetite and thus raising the bar for a potential breakout. Also, the higher highs recorded in the index are not met by a similar move in the stochastic oscillator. This increases the risk for a bearish divergence and a potential correction in the overall long-term positive trend.
Third step: 4-hour timeframe
Long-term investors would be content with the weekly and daily analysis while very short-term trades would look at the 4-hour chart very briefly before delving into the 1-hour and 15-minute timeframes. For our purpose, the 4-hour seems sufficient to understand the shorter-term dynamics, identify the key levels for potential entry and exit in the market. The GER40 index has been moving inside a rectangle since early February as the recent breakout appears to be a false one. In addition, the result of the latest price action is the convergence of the SMAs, which in our book means that an increase in volatility is potentially on the cards. Moving to the momentum indicators where, based on the ADX, the recent bullish trend appears to have run its course. The RSI is trying to stay above the 50-midpoint and the stochastic is moving lower in a vertical fashion. The bulls could potentially set up at their defense at the April 16, 2021 high of 15,512, and the busier 15,352-15,451 range, set by the 50-, 100- and 200-day SMAs.
Putting everything together
The process of examining multiple timeframes tends to be time-consuming and potentially confusing. However, it is a better way of analyzing the market and obtaining an all-around view of the developments than just focusing on one time period. The timeframes examined can be adjusted to the profile of each trader, but we believe that the analysis of the daily chart should feature in everyone’s armory. Regarding the GER40 index analysed here, we are faced with:
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