For readers who have been following the DAX forecasts over the past few weeks in the run-up to the German elections this coming Sunday, it is now time to tread cautiously.
Although all roads lead to another Merkel victory, ruling out any surprises would be complacent. So far some clouds of uncertainty were removed as the ECB maintained the status quo at its monetary meeting policy meeting earlier in September, as we expected.
Next week’s big event will be the FOMC meeting which could potentially impact the European markets as well. The Fed is expected to keep rates unchanged but the market reaction to the balance sheet normalization will be tricky. The U.S. dollar has been in a free fall for the most part of this year. While there is scope for a reversal in the greenback, economic data suggests a further decline in the U.S. economy, thanks to the hurricanes, Harvey and Irma.
As Germany heads to the polls on Sunday, September 24 the German DAX has so far behaved as expected, especially after price action bounced-off the support level at 11962.5 – 11895.5 as mentioned here. The reversal saw the leading index breaking above the near term resistance level of 12303.0 to close the week as 12512.0 and moved closer to the expected target.
The question now is whether the DAX index will retrace the gains.
This is partly one scenario. A retracement to the rally could see the German DAX falling back to 12303.0 where support could be formed. However, in the event that the DAX fails to establish support here, further downside can be expected.
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German DAX, daily chart – Watch for a retest to establish support at 12303.0
This will push the index back to the previous support at 11962.5 – 11895.5. While traders should prepare for this eventuality, it is best to cover the risk at this point and even look at booking some partial profits.
Based on how price action in the DAX evolves at the 12303.0 level, we can expect to see new positions likely to build up here. The upside target remains at 12669.0 which will complete this trade forecast into the run-up to the German elections.
While the upside target to 12669.0 remains on the cards, we can expect to see further gains in a positive scenario. This could potentially push the DAX much higher above 12669.0 and rising higher to test the June 20 highs of 12948.5.
From a weekly perspective, however, the outlook is rather mired with price action suggesting that unless the previous highs are breached, the bias could turn to the downside. The weekly chart shown below shows the steady uptrend in the DAX price chart.
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German DAX Index Weekly Chart
We see that the index has posted two weeks of strong gains following the doji reversal pattern that was formed near 12142.5 region. This was also marked by a breakout from an inside bar pattern as well validating the upside bias in the index alongside price seeking support off the pitchfork’s lower median line.
Therefore, the weekly chart validates the viewpoint that traders who have been positioned to the long side off the support at 11962 support region could look at booking profits near 12669.0 level while removing any remaining risk on the table.
From here on, the DAX will likely suggest what will come next. A breakout above 12948.5 will see fresh highs coming and will put the index on a path for further gains. However, in the event that a lower high is formed below 12948.5, we can expect some serious correction in the index taking place.
Still, the major support at 11962 will be the line in the sand. A break down below this support will eventually push the DAX lower to 10804.00
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