DAX 40 technical outlook: Buyers lose steam after breaking key resistance
10:56, 2 November 2022
The German DAX 40 (DE 40) has attempted to form a fifth straight week of gains but the major European index is struggling to gather bullish momentum above the major resistance it broke last week.
Bullish sentiment has been stagnating ahead of the Federal Reserve meeting this evening but the technical picture is starting to support a further rebound in the DAX 40. The weekly chart shows the strength that buyers have garnered over the last month, with weekly gains of over 4% in the last two candlesticks.
DAX 40 daily chart
The move so far this week is showing some indecision, with resistance just below 13,500. The index has moved into a key area of confluence (13,298 - 13,677), serving both as resistance and support in the past year, and it is likely to face increased selling pressure limiting the move to the upside.
It’s hard to say whether the downside momentum that has dominated since the highs back in January is fully over, or whether this is an extended bear market rally that will give sellers a new opportunity to come in. So far. The three previous rallies within the descending wedge - marked by the green arrows on the chart - have stalled within the wedge, finding resistance on the upper bound of the pattern (the blue dotted line on the chart). So despite the pause in the rally so far this week, the technical setup looks good for a further rally if the 13,500 mark can be cleared by the close of the week.
If so, the key area to watch out for with regard to resistance is the upper bound of the confluence area (13,677) given we have seen some rallies stall around this level in the past. From there, assuming DAX 40 buyers can gather enough momentum higher, something that won’t be easy, the focus will be on the 14,000 mark, which hasn’t been touched since the beginning of June and was key to stopping buyers breaking higher back in May.
If on the flip side we see some weakness in equities over the coming days, possibly after the Federal Reserve remains hawkish in its rate hike schedule, then the DAX 40 will be at risk of slipping back into its descending wedge pattern. The lower bound of the confluence area (13,298) may offer some support but it is unlikely to hold if risk appetite deteriorates in the broader market.
Once within the wedge pattern, the selloff is likely to gather momentum and break below its moving averages, likely seeing lower lows and lower highs as it goes along. If so, a break below the 12,000 mark would be a good gauge of selling appetite and would probably mean a reversal all the way down to the lower bound of the wedge pattern.