Is the DAX Waving a Big Bullish Flag

With China and Greece-related fears now “resolved,” we may finally be entering the feared summer doldrums in markets, where traders are focused on getting to the beach as quickly as possible rather than pushing markets around. While the day-to-day volatility is typically lower in July and into August, it’s worth noting that longer-term trends can still provide strong trading opportunities for patient traders. In that vein, last week’s major breakout in Germany’s DAX index suggests that the longer-term uptrend may be resuming.

After peaking above 12,400 in early April, the DAX pulled back consistently within a bearish channel to test its 200-day moving average at 10,650 earlier this month. The index found strong support at this level (helped along by clear bullish divergences in both the MACD and RSI indicators), and prices have since surged nearly 10% up to 11,710 as of writing. From a longer-term perspective, the 3-month bearish channel could represent a bearish flag pattern within the context of the established uptrend, suggesting that the widely-watched index could go on to set new all-time highs back above 12,400.

More immediately, the strong inverse relationship with EURUSD could be the driving factor. If the EURUSD conclusively breaks below previous support in the 1.0800-20 zone, the DAX will likely break through the 61.8% Fibonacci retracement of the recent pullback at 11,700, opening the door for a potential move toward 12,030 (the 78.6% Fibonacci retracement) or 12,400 (the all-time high) next. Even if EURUSD bounces and the DAX dips from here, the bullish bias in the index will remain intact above the previous bearish channel, with support coming in around the 11,300 level.

Source: City Index