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Andreas Zanin
Analysis | December 21, 2020

DAX30 & DOW JONES: weekly analysis 21 – 25 DEC

Market movers

The FED’s meeting on 16th of December was disappointing for traders who expected changes to the amount and intensity of quantitative easing. Without a new president in place, the lack of change was rather predictable.

The central bank merely declared its readiness to use all the instruments at its disposal to reach its inflation and employment targets. QE will be maintained until substantial improvements in these targets are noted.

In short, the Fed is observant and will simply act if necessary.

In the meantime, markets are rising as they celebrate the US government’s approaching tax package and a “likely” resolution of the Brexit conundrum.

Friday’s rollovers led to a bullish close. Despite the lack of events, the market is still worth monitoring. The positioning and open interest data of the call options on the December expiry show a very high activity and a concentration of positions. This means that months and months of retail accumulation could lead to profit-taking as the Christmas season approaches.

Even though we are entering the holiday season, it is very likely that the market will remain volatile. Any negative news can be the catalyst for a massive sell-off. It is therefore a good idea to monitor the market, especially for those who have equities in their portfolios.

Analysis of the week and scenarios for the DAX and Dow Jones

The equity markets have arrived to the most important week of the year with new all-time highs. However, we saw slightly negative closings on Friday given the technical expiries. The Christmas rally is strong but the bearish divergences are evident on all timeframes. There is a high probability of a sideways phase or a strong decline.

DE30 – The DAX reached our first annual breakout area 13,650-750 where a double breakout attempt was punctually made and promptly stopped on Thursday and Friday. We reached the last resistance level of the DAX last touched in February. This is a key moment, if the German index will stay above 13,782, 14,000 points may be possible by the end of the year. We only have 6 sessions left and without a convincing push, we might be facing a new period high. The danger comes from the strength expressed in this week’s openings which left the Dax without relevant support at 13,373. Taking into account the movements of the last two sessions, if on Monday the index is positioned below 13,551, we may see a fall towards the 13,373 support mentioned above.

Should the price continue to fall, we’d like to highlight support at around 13,320-300. Further below, one must look at the support reached last week, 13,142 and 13,020. The possibility of a strong downward acceleration increases significantly if price breaches the 13,000 points area. In this case, area 12,723-635 is the first relevant support. We cannot discount reaching this area within one or two trading sessions. We also would like to remind you that this area is the monthly support zone; a persistent break of area 12,500 could open the door to further falls.

The key support levels are 12,155-12,237 and 11,766. If these levels are surpassed, a change in the trend is quite likely. If the price falls below 11,542 the first targets are identifiable around area 11,214-11,095, from here we may see a possible extension down to 10,766-10,480, last reached on May 15th.

US30 – On Friday, the Dow Jones slipped down from its historical highs despite closing with considerable bullish strength. As it stands, the agreement on the tax package remains the focus for traders going into the weekend. Technology stocks, which have supported the market this week, have been the main drag on the overall performance of the Dow and the S&P500.

Despite the bullish sentiment, the formation of a reversal pattern in the last session of the week may foreshadow that momentum might be ready to shift towards the downside.

Prices above 30,232 will signal a resumption of the uptrend whilst a move below 29,624 may change the main trend towards the downside. The upward price projection remains with a target around the 30,715-31,000 zone.

A sustained move below 30,220 will indicate the presence of sellers. If this movement is made on Monday, we might have a bearish week. The first target is 29,964 followed by 29,820. As the main trend is to the upside, we could see a technical bounce on the first tests of these levels.

If 29,820 fails as support, 29,751 will come into sellers’ sights. From here, there may be possible extensions to key support levels at 29,618.

The 29,618 level will continue to determine the trend of the index in the coming weeks.

It’s important to recall the loss of the weekly support 28,880-29,119 which could undermine the current trend. Below it, we may reach intermediate support around 28,319-28,051. A close below 27,762-625 would undermine the current bullish scenario.

Area 27,019-26,650 is an area not to be missed. This area has been successfully tested and has led to strong bullishness. Sellers will come back strongly if the 26,110 level is broken. The decline may extend to the main low seen on July 30th at 25,777. This is a potential trigger point for a new downward acceleration with three potential main lower targets at 25,399, 25,149 and 24,680. Annual support at 24,309 remains vital.

IMPORTANT NOTE – The conditions for a good downturn require a unison movement. It means that all indices must push in the same direction. Beware of false signals because volatility remains low, declines can be bought back at the end of the session or during the overnight market and start up again. Downward movements require high volatility, high volumes and continuity over several sessions. Without these conditions, buying will continue or, at worst, keep the price in a sideways phase. We recommend caution in the coming weeks, as high frequency traders will be the most active players and can create strong movements at any time of the day.

Our weekly appointment returns on Monday 11th January. I take this opportunity to wish you a Merry Christmas and a 2021 full of opportunities. See you soon!

 

Research provided by Giancarlo Prisco

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