Despite the recent fall in European equities, it seems the DAX has found some strong support in the market,and is looking to climb back up as a result. For many bulls out there it looks very attractive at present. With a strong bullish sentiment after finding support and at present sitting at around 9250 points, that leaves around 750 points in the index until the next major level of resistance at 10027.
When we take a quick glance at the charts we have an ascending wedge pattern starting to form and this looks likely to climb higher. It’s also worth knowing that ascending wedges generally precede bearish falls in the market.
With all the positive affirmation in the market, you have to wonder if it can continue. Well with the European Central Bank (ECB) struggling at present to enable growth in the Euro-zone, French preliminary GDP q/q was flat to 0.0%, and Germany showing a recessionary -0.2%; many in the ECB will be starting to worry and will in turn look to start some sort of quantitative easing in the economy.
The only problem with more stimulus is that we could end up with a liquidity trap in the Euro-zone; where money pushed into the system ends up being hoarded instead of being used for investment, in turn leading to no real change in interest rates at all and making easing ineffective.
However, in the short term we will have to wait and see what the ECB does.
What is clear on the charts is that investors so far are quite bullish on the DAX and the future outcomes at present. I’m not so sure of things, given the conundrum that the Euro-zone finds itself in with high unemployment and growth figures that are essentially flat.
As I previously mentioned, the DAX is in an ascending wedge, and it would not surprise me to see it fall further, despite the prospect of markets being overly eager on stimulus. Draghi is a good leader of the ECB, but he prefers to talk tough and let the markets work so he does not have to intervene (a good idea in a divided central bank, given the politics at play). He will look to talk tough and bring an end to stagnant growth; less he emulate the lost decade of Japan.
Going forward, the DAX looks bullish, but in the short term, it may only remain so. The Euro-zone still has its fair share of problems and these don’t look like they are going away anytime soon. The bears will be watching as a result and when they get a chance they will most certainly strike.