DAX eyes record high as stocks extend rally

European stocks surged higher this morning, led by the UK’s FTSE with a gain of 1.2% followed by the German DAX index which tacked on 0.9%. The region’s other indices were higher too, following a mixed session in Asia and after shares on Wall Street managed to relinquish most of their earlier losses yesterday to close slightly higher. US index futures pointed to new record highs for the S&P and Nasdaq. The risk-on tone is also evident is FX with the risk-sensitive New Zealand dollar being the strongest and safe-haven Swiss franc the weakest at the time of writing.

US-China trade optimism supports sentiment

Sentiment remains supported above all by ongoing optimism that the US and China will agree to a phase one trade deal soon. Investors welcomed a report that said the US would extend a license to allow American companies to do business with Chinese tech firm Huawei. News that the US President Donald Trump “protested” to the Fed’s Jay Powell that he should consider lowering interest rates in par with other developed countries was also greeted with cheer. The dollar fell sharply yesterday, and the buck was struggling again at the time of writing, especially against commodity dollars and the euro.

DAX breaks out

Source: Trading View and City Index.

The DAX, which had been consolidating its gains over the past 7 or 8 trading days holding near its highs, broke to a new multi-month high this morning. The recent consolidation allowed short-term oscillators to work off their severely “overbought” conditions through time rather than price action, which is bullish. With sentiment remaining positive, the index continues to hold in the sweet spot above the still-rising 21-day exponential moving average (EMA).

When short-term EMAs are rising, this is usually a sign of a strong bullish trend. Right now, even the very short-term 8-day EMA is sitting above the 21-day EMA and both are rising. They are objectively telling us that the trend is bullish and will remain that way until and unless we see a reversal stick and a breakdown in the daily time frame.

Shallow pullbacks

With the 8 and 21 EMAs pointing higher, we are continuing to expect shallow retracements until the bullish trend ends. As such, a pullback to the top of old resistance range around 13290/13300 could be defended, leading to another push higher.

The next bullish objectives for the DAX bulls are at 13528, the 161.8% Fibonacci extension level of the downswing from July to August, followed by 13594, the previous record high hit in January 2018.

Wait for bears continue

However, if the index turns lower and takes out the base of the recent consolidation range and Monday’s low at 13136, then in that case the bullish bias would become invalidated in the short-term outlook. In this potential scenario, we could see a deeper pullback over the coming days. But the bears must see this breakdown first before stepping in, as the trend is currently objectively bullish.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.