Shorting - index levels to watch

With Germany 30 and Nikkei 250 ranging low last week, we look at key levels to watch for short-focused traders.

Source: Bloomberg

Typically, downside volatility is ‘triggered’ causing an abrupt change in how the asset is priced leading to an aggressive price decline. The price traveled in terms of time is much more aggressive and winning trades, if they are had at all, are often opened and closed in a much shorter period-of-time than a successful long trade.

Market: Germany 30

A key technical breakdown on the Germany 30 came when the price broke below the 2018 opening range low at 12,740. This is known as an opening range reversal, and such a development can be indicative of a wash out of institutions who establish positions early in the year closing out their long trades and flipping to a short campaign. As such, the bias will remain for further losses while the market trades below 12,740.

Currently, the price of the Germany 30 is being supported by the 38.2% Fibonacci Retracement of the 2016-2018 price range of 8,696-13,608 at 11,731. A breakdown below 11,731 would give rise to an opportunity to target a drop to the 50% retracement of the same range mentioned earlier at 11,152. The price rebound has been strong on the Germany 30 after the February 6 low. Traders should look for price to hold below the 38.2%-50% retracement on the rebound at 12,425-12,653 for bearish pressure to remain. A break and daily close above this zone would hurt the bearish technical case and would favor setting an entry order if price violently drops again as it did in early February for the short trader to ride lower with risk management applied.

(Source: IG Charts, created by Tyler Yell, CMT)

Market: Nikkei – Japan 225

The Japanese Index rallied 26.94% from September 2017 after PM Shinzo Abe’ election victory and continuation of his historic monetary easing program called ‘Abenomics,’ would likely continue unabated. Like most other asset classes in late January and the first week of February, the Nikkei gave up most of its gains, and indeed fell by 61.8% of the 26.94% rally in a matter of weeks to the 200-DMA, and currently looks to be supported near 21,000.

Traders looking for further downside should be encouraged further by the Japanese Yen strengthening by the most since November 2016 against the US Dollar, which puts considerable weight on Japanese exporters. The combination of soured risk sentiment and a stronger JPY could lead to a further decline to 20,146-19,232. Short-focused traders should not hold a short-trade below 20,718, the February 12 high as an aggressive rebound could be quick and drop the short traders equity in a hurry.

(Source: IG Charts, created by Tyler Yell, CMT)

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