Sharp falls take wind out of DAX

Price at time of writing - 9172.

Despite seeing my short DAX recommendation 'stopped-out' recently, my last update suggested that, even if the German index were to go higher, a re-test of the resistance/support band (defined as 8942-9054) would still be required.

The very aggressive two-day fall last week has confirmed this requirement; it now remains to be seen whether this is the beginning of a deeper correction, or whether it has set the index up for further gains. We continue with the neutral recommendation for the moment.

In my view, a fall below 8942 will confirm the DAX is in the early stages of a deeper correction. If so, a pull-back from the recent high of at least 8.33% should be expected, and I have added this line to today's chart. Although the recovery on Friday appeared impressive at a glance, we should disregard the move completely when determining whether a change of trend has occurred. After all, the reasons provided by commentators for the recent equity rally are precisely the same reasons behind for the sharp falls earlier last week. The US taper is approaching, and ten-year bond yields are rising globally.

The sharp falls witnessed last week have taken the steam out of the DAX, but, nonetheless, it remains a high-risk time to jump back in. Both major US share indices – the Dow Jones and S&P 500 – have aligned in triggering 'short sell' recommendations, and softer US markets will always provide stiff headwinds for the rest of the world. 

Recommendation: Neutral. Sell short on a break below 8940. The target then becomes 8640.

Germany 30 chart

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