What’s inside:
- DAX trades towards apex of rising wedge
- Waiting for breakout, not predicting direction
- Top and bottom-side scenarios outlined
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In recent commentary, we’ve been tracking the developing rising wedge the DAX has been etching out since late-January. At this juncture, the pattern is considered fully mature, all we need now is a breakout.
Should we see an upside breakout, and if it sustains, then at the least we’ll be targeting the 2015 record highs at 12391. The key words in the last sentence are “if it sustains”; the reason being is that upward breaks on rising wedges (downward, too, but to a lesser degree) are prone to false breakouts. But we won’t worry about that scenario until it happens – we can only run with what is immediately presented to us and demonstrate flexibility when conditions change. With that said, should we see a break above the top-side trend-line and minor resistance in the form of the August trend-line, we’ll run with the long-side. It would be in the event of a break higher, then drop back below the bottom-side t-line of the wedge that we could consider it a false breakout and look to go the other way. Again, we’ll cross that bridge if the time comes.
A close below the bottom trend-line of the wedge and December trend-line would warrant a bearish bias. Sure, like a top-side breakout it could fail and trade higher, but in our experience wedges which break against the trend (especially if it comes with a strong initial burst of momentum), tend to be a ‘surprise’ event and often times lead to powerful moves; the crowd of accumulators throughout the pattern are left holding the bag. It’s worth making mention that the ‘break higher, then fail’ scenario can lead to even sharper declines given the bigger surprise element. A bearish break would have us targeting the bottom of the wedge around 11500.
To start the day, we are treading once again along the bottom of the pattern and the December trend-line. These lines are to be trusted until broken, as we’ve seen for the past month.
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—Written by Paul Robinson, Market Analyst
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