Yesterday’s price action was very strong with the DAX up nearly 3 and a half percent by mid-day. To put that in perspective I looked at how many times the DAX has actually managed to finish up 3% in a day. The answer is six out of 750 trading days. In contrast, oil and other indices around the world continued to sink – it looks like DAX got ahead of itself yesterday with a mini Santa rally. In the run up to Christmas it’s not uncommon for stocks to get ahead of themselves.
You can see momentum started turning up a few days ago (see MACD at bottom of chart). However, it must be noted that the MACD is still technically bearish/negative (the MACD is still below the signal line) and still has room to reverse direction and continue downwards.
I mentioned previously DAX would likely test its September high 10,500 (the red dashed line on the chart), which is an important level to watch. A break above would be a sign that the bulls are regaining control. If price throws back downwards it shows the bears are still strong and not ready to let go. I also mentioned a word of caution about any breaks past this level. Firstly, we can expect volatility this week, markets are still digesting the US Fed rate hike. Secondly, we are now heading up to Christmas where investors get excited and fundamentals can go out the window. I would allow a bit extra time to see if this break above 10,500 holds or not.
Bumping up against the downtrend
From the chart I’ve highlighted in green yesterday’s price candlestick. You can see there was a strong rally with a test of 10,800, but was unable to hold a close above 10,800. This is not surprising. 10,800-11,000 is a pretty strong area of resistance. Overall, if we do get a Santa rally I do not expect it to get very far or hold its gains into 2016.