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DAX rallying towards key resistance as FOMC statement looms

Last updated 6/20/2012 7:22 AM EST (GMT -5) 0 Comments - Add your comment

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Fawad Razaqzada

Technical Analyst, GFT

Follow @FawadR_GFT

Here is a very interesting daily chart of the DAX index. At the time of writing, the German benchmark is heading towards the key 6400-mark. This level was previously support/resistance as highlighted by the shaded blue/pink circles. As well as this, we also have a few other technical factors coming into play around here. There is the 38.2% Fibonacci level  (6405) of the retracement from the sell-off that started in March (connecting points B to C on the chart);  the 50-day moving average (6423), and a bearish trend line (although this is some distance above the other levels).

But technical analysis works (best) only in the short/medium run. While it is highly possible we could get a pull back from around the 6400 area, it is the fundamentals that will ultimately determine the long term direction. All eyes are on the US Federal Reserve ahead of its decision on monetary policy later this evening. If we get a stimulus package that is considerably more ambitious than what the markets currently expect then the DAX could simply shoot through this resistance area without hesitation. Conversely, we may only get an extension of the “Operation Twist” or nothing at all.  So, there is scope for disappointment and therefore it is best not to fixate our minds on one particular direction at this stage. In addition, the major stock indices tend to move together, and there are bullish patterns currently forming on the FTSE 100 while the S&P 500 is testing a key resistance area .

Nevertheless 6400 on the DAX is a key level to watch, and a break above it would have important implications for traders involved in the equity markets. The bulls will want to see a couple of closes above here before jumping on the bandwagon. This will ensure that there is no false breakout. They would probably see 6550/60 (previous support/resistance and 50% retracement of BC) as their initial near-term target. The bears on the other hand will not be too concerned unless we get a close above the red trend line. Their next target could be all the way down at around 5800/20, a level which marks the 61.8% Fibonacci level of the last major rally (AB).

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About The Author

Fawad joined GFT as a technical analyst in 2010 and has since focused on timely market commentary and research for GFT with an emphasis on technical analysis. He achieved his CISI Level 3 Certificate in Investments (Derivatives – Retail) in early 2011.