Dax Index Bearish Divergence Suggests More Downside Lies Ahead

Summary:

Dax index looks bearish as the market forms a rising wedge pattern and a bearish divergence with the RSI. More weakness lies ahead.

The German Dax index looks bearish after the price action broke from a rising wedge pattern. As it is often the case the market has also formed a bearish divergence with the RSI, suggesting that more downside lies ahead.

The bearish reaction was triggered by the weak close seen last week in the United States equity markets. The Dax index and the other indices in the developed world are correlated to the S&P500 and the Dow Jones and rarely diverge.

However, the ECB was quick to state its willingness to keep the easy stance despite the Fed turning hawkish. Effectively, it means that the ECB will continue its PEPP purchases during the summer months and beyond, putting pressure on the euro, but helping the equity market.

Dax Index Technical Analysis

At this point, the technical picture looks weak. In order for the rising wedge to be valid, the market should not return to the recent highs anytime soon. Hence, bears may want to sell the index short with a stop at 15,800 and a move below 14,500. Bull, on the other hand, may want to wait for the Dax index to make a new higher high before going long with a stop at the recent swing lower and a target set by using a risk-reward ratio of 1:2.