Trade of the week: short DAX 40
We would like to use last week's bounce in the DAX 40 to short it. We believe the index is likely to resume its mid-August descent and will continue to underperform US indices.
(Partial video transcript)
This week's trading opportunity
Welcome to "Trade of the week" on Monday 22nd September. Last week, I didn't put a trade on because I didn't have a clear signal with a high probability, low risk setup.
Now, today's "Trade of the week", unfortunately for you, has already moved 100 points in the direction I wanted it to move, but basically it is to go short the German DAX 40. Why? Well, for fundamental reasons. The S&P 500, the Nasdaq 100 and the Dow Jones have made record highs over the last few weeks, nearly every single day. And yet the DAX declined, as you can see on the daily chart.
So we're seeing relative weakness in the German stock market compared to the US stock market. And what's been happening is that we've seen a rotation and we're still only seeing that out of the powerhouse of Europe and, basically, back into US stocks, into the tech stocks in the US, etc.. So we have relative underperformance and technically, what I also found interesting is that we've had this downtrend line.
Now with the Federal Reserve (Fed) move last week we had the DAX rally very strongly. But can you see we just tested that resistance line and then we came off again. And this morning, I had a sell signal just below that low here from Friday. And, as I say, we’re already trading 100 points lower. So would I get in now? The risk-reward has changed since then, so probably not. So we'll still put the "Trade of the week" on as if we didn't see today's move. Maybe it will bounce back. Who knows?
So, the idea is you go short here because we believe that's just a spike like we saw back in early September. And that's then going to be followed by another down move. So, what we want to do is go short around 23,600. Put a stop-loss above not just the downtrend line, but also the last few reaction highs here, just slightly higher, probably just above 23,900. That's the fifth of September high. And a downside target probably around 23,200 or even lower than that.
This week's trade in summary
So today's "Trade of the week" is to go short the DAX 40 at around 23,600, with a stop-loss around 23,900 on a downside target around 23,000, or even lower than that.
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