DAX index
The Dax index moved in a tight range for the month of April and starts May in a vulnerable spot. A head and shoulders pattern is visible on the lower timeframes and the risk is that the market will push through the neckline.
What can sink the markets in May? Why would the Dax decline when the vaccination efforts pick up steam all over Europe?
One likely explanation is the fear of rising prices. Rampant inflation should not be discounted by market participants, as yesterday’s ISM Manufacturing data in the United States showed higher inflation is likely over the summer. Prices paid reached close to a level not seen since the 2008-2009 Great Financial Crisis, hinting at rising inflation ahead.
What does the US inflation have to do with the German Dax index? Traders may remember that financial markets are correlated, and rarely developments in one advanced economy do not affect others.
The market struggles at the neckline of a head and shoulders pattern, and the bias is that a move lower will trigger more weakness. Bears may want to sell-short the index on a daily close below the neckline and a stop-loss order at the highs of the pattern. As for the target, a risk-reward ratio of 1:2 should provide the exit level.
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