DAX: Head Over Heels In Love With The Bulls?
Dirk Friczewsky | Nov 29, 2012 02:10AM ET
Over the past few days European equity markets were set to open lower, but suddenly they came back - as did Germany's leading index, the DAX. We hear and read a lot of stuff about the worries dealing with the fiscal cliff in the United States. Wall Street ended up with red numbers yesterday (futures right now ticking around 12.850 for the Dow Jones and around 1.394 for the S&P500 at 14:09 CET) because of worries about the missing action on US budget talks. We see investors taking volumens out of the major US-markets. Taking a closer look at the german leading index Dax, we still see enormous strength and the will to push higher into the next resistance-zone around levels of 7.400. Is there a good chance of a rally into the end of the year? Analysts, experts, traders and some gurus are talking about a first conflict-zone around that 7.400 and a possible bounce into 7.600-7.800 until end of december. Well, from my point of view that would be my perfect short-entry-scenario. Key economic numbers may deliver some opportunities to place new short-entries the next days giving the fact the german market suddenly shows some chart-technical spikes.
fiscal-cliff-event shows the red card to the markets If Obama and Boehner can´t find their route the US may slip into recession the first quarter of 2013. We all know the reason: from the beginning of 2013 new tax-rules and budget-cuts will be effective. Obama and Boehner could avoid that with a new deal during their budget-talks.
Until today it seems like every party is still cooking up the whole thing without a new sign of a solution. Today Obama is about to meet CEOs from Goldman, Yahoo, etc. - they may give new ideas, wishes and could lead some talks into a new direction. However, we will have to trade what we directly see on our screens. Be sure we will have some bumpy roads ahead of us in future markets. Right now the budget-talks of the worlds biggest economy lead into new pressure in various major markets.
DAX with strong performance in 2012 You may read about companies dealing with structural problems in their business like E.ON AG or RWE AG. These two papers will be a nice pick soon. E.ON AG for example looks like a landslide - they went down from EUR 19,50 to EUR 13,70 and still look for a test of that technical mark around EUR 12,50 the next days or weeks. However, E.ON will give you a nice yield holding it into the next dividend-season. Looking at the current price and the latest reports of the management, you will definetely get a yield above 5 percent - even if the management says they will cut the half of the dividend. Another company to watch is Thyssen-Krupp. They have a lot of work to get rid of their plant in Brasil and on top face a lot of trouble with their plant in the U.S. – you may dig more into details.
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Thyssen-Krupp may dip to EUR 11,50-13,00 again, but could be a nice take on the path of recovery. Another pick could be Metro AG, a former member of the DAX30 and now listed in the second big german index MDAX. Metro AG could be a good pick around EUR 19,50-21,00 and could give investors another nice return (yield at current level around 6 percent).
DAX only with signs of small vulnerability Regarding topics like correlations between U.S.-markets and german markets the DAX still shows less vulnerability. It seems like the DAX is less affected with problems such as the fiscal cliff or the european-debt-crisis. We see markets around Germany less performing besides the non-EZ-countries Switzerland and UK. German growth is still a story to buy. The german GDP is not mounting the way it did before, but comparing it to the rest of Europe it is still growing. The german story seems to be more attractive to global investors. It feels like investors skip France or Italy and Spain and buy the german standard.
Doing hard with research you will learn more about quality of the biggest german companies.
Where are we heading to?
The DAX did well in 2012 - a performance of around ~25 percent until today looks like one of the best years and makes you open the bottle of champagne. So it could be useful for a part of big investors to take some profits and go back into cash. One the other side it could be smart to stay in the stock-markets just because of the desperate search for yield many investors face, when they look into their balances. Insurance companies, funds and even central banks are facing a serious problem - the search for yield and a more perfect diversification-processes.
Yields went down in various bond-markets and a lot of investors are quite sure they can´t step away from the stock-markets. In difficult times cash isn´t always "king"!
DAX - picture still looks mixed
Today (during morning-session) we see a lot of traders investing in DAX-puts at EUWAX - the EUWAX-Sentiment-Index ticks around in negative territory with -30 points so far. Tuesday, the DAX didn´t make it above 7.360ies, today it dived down to ~7.265 - 7.240ies need to break to let the Dax close an open gap between 7.206 and 7.188. From a technical point of view the DAX could make a lower high around 7.400-7439-area.
The last high from 11/07/2012 was 7.439, which already has been a lower high down from 7.449 from 10/18/2012 and 7.482 from 09/21/2012. So the downside-trendline from 7.482 to 7.439 could be tested - a good area to start positioning for a first short. Ticking sub 7.250 should lead into 7.190ies first. Getting back above 7.360 (old highs form yesterday) should lead directly into 7.400.
Technicals
The DAX is trading at 7.330 (16:52 CET). The RSI indicates 57,8060 on a daily chart - currently there are a few timeframes with an overbought scenario (only 1min/5min). On a daily basis the DAX generates the following supports and resistances: (S3) 7.253/ (S2) 7.279/ (S1) 7.306 und (R1) 7.358/ (R2) 7.385/ (R3) 7.411. A lot of indicators and further signs give us the impression to wait for some further upside-movement to place new shorts. Be ready to place shorts between 7.400-7.600 area with leverage from 5-10 and try to protect shorts with levels around 7.850ies. Perfect scenery would be shorting the first test of R3 7.411 or one strong and short break above!
ATTENTION: Derivatives work in both directions of the market!!!
Please be aware that derivatives and other financial instruments work in both directions of the market. Please don´t trade with to high leverage and don´t be too greedy. Better take small winners steadily than taking huge losses once. It is a tough game and task to recover from a huge draw-down and often impossible to recover after you had the big shredding of your account. Patience and diversification, risk-management, money-management are your first duty. Not obaying rules like these may make you lose your panties in a minute or even faster.
Think about it! You are not trading against kids and dummies, you are trading against kings and masters and often enough against systems. Finally you are trading against yourself - each day and with every order you have placed.
The best wishes, greets to all traders, readers, investors and clients. Have the perfect and sunny week and the perfect start into your market loaded with fantastic opportunities!
Dirk Friczewsky
Friczewsky Financial Markets
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