DAX
A bullish flag formation on the Dax index shows consolidation similar to other stock market indices too. The price action on the Dax index is not unique but resembles the one on the Dow Jones or other stock indices in the United States.
This is a theme for 2020 – the stock markets around the world moved in tight, correlated steps. A close look at the chart below tells us that the recent rise in the Dax started with the US elections. What does this have to do with a German index?
In any case, the potentially bullish flag needs a reason for the breakout. Today’s strong manufacturing PMI data in Germany was not enough for the index to break the upper edge of the flag. The reason for that came from the part of the services, which dipped below the 50 level. In a way, it is understandable because Germany is in lockdown due to the coronavirus outbreak. As such, investors might have priced in the poor data and focus on the bigger picture.
This is the Thanksgiving week, and thus a shorter week than normal as the US banks are closed on Friday. Typically, during Thanksgiving week, the markets follow on the previous trends and rarely do we have market reversals. If that is the case this week as well, it means that we have the potential for the Dax index to try to break higher.
Today we saw the PMI data in Europe. The services sector is a drag, as flash services PMI came out at 41.3 vs. 43.6 when compared to the Reuters’ forecast.
However, the German manufacturing PMI data showed increased growth in the sector. The indicator reached 57.9 on expectations of 56, sending a strong signal that the German economy, the engine of European growth, is still resilient despite the challenges posed by the COVID-19 virus.
This is a third positive Monday in a row for promising vaccination results. Last Monday, Moderna announced its vaccine has a potential efficacy of up to 95%. One week earlier, another US pharmaceutical company, Pfizer, made a similar announcement.
Today it was AstraZeneca’s turn in the United Kingdom. While its vaccine is not showing the same efficacy as the ones mentioned earlier, it does come at a lower price. The company vowed to offer the vaccine at the cost, effectively making no profit on it.
Naturally, the news gave a boost to the market sentiment, sending the Dax index close to the breakout point. However, so far, it failed at the horizontal resistance.
The bullish flag mentioned in the article so far is visible on the chart below. The Dax index literally bounced together with the US stock market at the start of November. Following Election Day in the United States, the Dax recovered the lost ground, and for the past couple of weeks trades around the 13,000 level.
Another bullish argument for the Das is that the recent consolidation, the one that resembles a flag, can also be interpreted as the right shoulder of a head and shoulders formation. If that is the case, the measured move for the potential inversed head and shoulders is like the measured move of the bullish flag.
Having said that, bulls should focus on two things – one is the measured move, shown in orange on the chart below, and another one is the breakout.
Bullish flags are tricky patterns. They can form either on the horizontal, as the Dax index appears to, or against the main trend. Because of that, it is crucial to wait for a breakout before trading the flag.
Also, another unknown in the pattern is that there is no limit to the time it takes the flag to form. Therefore, the best approach for bulls would be to wait for the price to break the flag before going long. A daily close above 13,350 would satisfy that condition. If that happens, bulls may want to have a stop loss at the lower edge of the flag and to target the measured move around 15,000 for a nice risk-reward ratio.
