Time to take DAX profits

Price at time of writing – 8985.

Of all the markets I cover in these regular updates, the one to generate the most important news last week was Germany, where the benchmark DAX index has fulfilled my long-term major target of 8972. 

Profits should now be booked, as the 8972 target marks the completion of a 150% rise from the unique low in March 2009.

To be specific, my take-profit level at 8972 was the centre-stone within a broader target band defined as 8942-9048, and some probing to the top of this band is entirely likely. But holding the DAX has now become a higher-risk trade, and we are likely to see some underperformance emerge from German equities. Adding further risk to the short-term trade is the fact the DAX now reads a much overbought 85 on its oscillating Relative Strength Index (RSI). Readings this high are nearly always followed by a pull-back or consolidation to some degree. It remains to be seen what the mainstream will determine as the fundamental trigger behind any such pull-back in Germany, but I speculate that a stock rotation back towards the underperforming mining and resources sector (on the back of gains in commodity prices generally) could be behind such a move. Germany's world-beating manufacturers are hungry consumers of these basic materials.

Traders may wish to consider opening a short trade on the DAX, possibly as a hedge against long positions held on other markets that are yet to complete their own upside targets.

Recommendation: take profit.  Aggressive traders should sell the index at 9048, with a target to be defined in the coming week.  Stop-losses can be activated on strength above 9200.

German DAX chart

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