DAX 40 technical outlook: key resistance halts bullish momentum
13:49, 10 January 2023
European stocks have been outperforming their US counterparts at the start of the new year as China’s reopening and encouraging economic data have boosted optimism.
As has been the case most of 2022, the FTSE 100 (UK 100) has been leading the gains given its high correlation to China within its offering as well as materials and energy stocks. But the DAX 40 (DE 40) has also been outperforming in recent weeks, managing to close higher on 5 out of the last 6 sessions. The index had already shown bullish potential as it had consolidated sideways during the second half of December after pulling back from 6-month highs after the December ECB meeting.
Easing price pressures continue - US CPI in focus
Aside from the positive tone from the Chinese reopening, recent data - including strong euro zone factory activity - suggests a milder-than-expected recession. Further aiding these hopes is the recent report from Goldman Sachs that it no longer expects to see a technical recession in 2023. Their view is that while the winter months will remain weak, there was more resilient growth at the end of last year, again boosted by the early reopening in China and lower natural gas prices on the back of a milder winter in most of the Northern Hemisphere.
Another data release that has buoyed positive sentiment is the drop in the euro zone’s headline inflation, which shows easing price pressures. On this note, Goldman’s report points out that inflation has moved past its peak given the drop in wholesale energy prices, and they expect core inflation to also drop as goods prices continue to cool. The one sticky area will be the services sector, as wage pressures continue.
All of this coupled with the drop in average hourly earnings in the US, which suggests cooling domestic inflationary pressures, markets remain convinced that central banks will continue to ease their monetary policies over the coming year. The next meetings will take place in February (FED on February 1st, ECB and BOE on February 2nd) and markets expectations are leaning towards a 50bps hike from the ECB (81% vs 19% for 75bps) and 25bps from the Fed (75% vs 25% for 50bps). The US CPI data on Thursday will likely be a key factor for the Fed’s decision and also for market positioning, which is still underestimating the Fed’s ability to achieve a soft landing and keep rates elevated for longer. Expect this data to also have an impact on European markets.
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DAX 40 outlook
The beginning of January saw the DAX 40 break away from its sideways range around the 14,000 level, leading to 3 straight sessions of higher highs and lows. We then saw a pause for breath on Thursday prior to the US NFP data as the ADP report showed better-than-expected job additions in December. That turned out to be true when the NFP came out on Friday, but the weaker average hourly earnings were enough to cement another leg higher in risk sentiment, pushing the DAX 40 above its December highs and to a new 7-month high.
But the bullish momentum wasn’t over yet, as the weekend news about China’s early reopening saw European stocks piling on the gains, which saw the DAX push even further to the highs seen in March 2022 around 14,830. So far today we’ve seen a modest pullback as momentum consolidates but it's also key to point out that the German index has attempted to break into its 2021-2022 key confluence area. It’s here where we saw most of the support containing the pullbacks throughout 2021 and it then briefly turned into resistance in the first few months of 2022.
This key range is between 14,813 and 15,000 and for 9 months (between May 21 and Feb 22), sellers could not get a daily close within this area, let alone break below it, despite there being 6 key attempts to do so. When momentum finally changed in February last year, the selloff was intense but even then the key range managed to act as resistance on two occasions before the 2022 bearish cycle took over.
DAX 40 weekly chart. Photo: capital.com. Source: tradingviewThis key range is between 14,813 and 15,000 and for 9 months (between May 21 and Feb 22), sellers could not get a daily close within this area, let alone break below it, despite there being 6 key attempts to do so. When momentum finally changed in February last year, the selloff was intense but even then the key range managed to act as resistance on two occasions before the 2022 bearish cycle took over.
The pullback from this area so far in Monday’s session suggests we could see its resistance/support effect come back into play. For this to happen, we would need to see the index attempting to break higher but failing to find further buying support within the range and therefore pulling back before the daily candlestick is over. This would then lead to a modest retracement, probably back to 14,000 before attempting to break higher again.
As mentioned earlier, the US CPI is going to be a key risk event this week and could determine momentum going forward. If risk sentiment is reinforced, on the back of a weaker inflation reading, then it will be the perfect occasion to test this theory of the key confluence area acting as resistance for the next few weeks. In the event that the DAX early breaks above 15,000 then it will be invalidated altogether.
On the daily chart, the RSI is moving in unison with the price which strengthens the convictions that we may continue to see bullish momentum and an attempt to break above the key resistance.
DAX 40 daily chart. Photo: capital.com. Source: tradingviewMarkets in this article
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