Is DAX heading for danger?

Price at time of writing – 9400.

In line with other global share markets, the DAX rallied strongly last week, unwinding what had become a moderately oversold relative strength reading.

In keeping with its recent trend, however, the DAX showed independent strength, rising further as a percentage than most other indices. As the DAX now positions itself back at its recent high, we must be on guard as to whether a potentially dangerous double-top is in the process of forming.

Typically, highs of significance are formed around a double- or triple-top formation. One explanation may be the investment psychology that prevails at these times. A ‘buy the dip’ mentality is endemic after years of spectacular gains, as those investors who missed the rise feel obliged to make up for their lost opportunity. We may be witnessing something along these lines in the German market currently.

Nonetheless, we are prepared for all circumstances, and as always will be guided by the Gann theory itself. As the current strength emanated from a minor low in September, I have added percentages derived from this low onto today’s chart. We can see that this rally faltered following a rise of 8.33%. By doubling this percentage to one of 16.66%, a line has formed at 9444. We can use this level as a marker for our stop-loss strategy.

Recommendation: stay short. Stop-losses can be applied and triggered on strength above 9475.

German DAX chart

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