DAX30 & DOW JONES: weekly analysis 01 – 05 MAR
Market movers
Rising Treasury yields this week have put strong downward pressure on equity markets.
But what drove bond yields so high? Firstly, we saw the entire US yield curve rise. Second, the sell-off on the 10-year maturity is related to a phenomenon called “Convexity hedging”. Convexity hedging is a hedging operation by investors on mortgage-backed bonds. These bonds are in the portfolios of banks, institutional investors and the Fed. It’s interesting to note that neither the FED nor the banks use convexity hedging operations. Convexity hedging is only carried out by institutional investors. In practice, a few investors can do great damage to the whole system.
And so, when yields on the US curve go up, the stock market also suffers.
A rise in the entire yield curve becomes a de facto negative for macro growth and tends to reduce the effects of fiscal and monetary stimulus policies. In addition, it has a direct impact on the currencies of emerging countries. The dollar goes up and emerging currencies go down. This increases systemic risk. We should not underestimate the situation, because funds, given the mathematical models they use, could increase their exposure in bonds and sell equities.
For the coming week, we are waiting for several macro data points. Next Friday, we expect to see how many new jobs were created in February. Analysts are predicting a figure of no less than 148,000, a halt to the positive trend that had been established since the post-pandemic. The unemployment rate is also expected to rise slightly from the current 6.3 % to 6.4 %, according to the consensus.
We will then oversee data for the purchasing managers’ indices for the manufacturing and service sectors in Europe, the US and China.
Eventually, oil prices are expected to change in mid-week as the Opec+ meeting takes place. The agenda is going to revolve around the production cuts policy: Saudi Arabia’s desire to remain at current levels (around 7 million barrels less per day), is likely to be in contrast with Russia, which is pressing for an easing.
Analysis of the week and scenarios for DAX and Dow Jones
After continuous high lows, false signals and bullish traps, the market has given an extraordinarily strong indication on the next direction. Although a reversal was expected, it is important to follow price levels carefully to understand where we are heading in the coming days. The short-term bearish trend can see an upward reversal at any time so we will monitor every weekly opening and closing to correctly follow the indices’ movements. If we follow with high volumes and volatility, a lasting reversal of the short-term trend is excluded, unless certain resistances are recovered.
DE30 – The German index opened last week with a heavy drop. On Monday, after almost reaching the 14,000 points area, it fell vertically until it found an intermediate support in the 13,650 area. It then rebounded sharply returning back to the 14,072 area and closed the week in the 13,800 area after testing 13,650 again creating a double weekly low.
We mentioned last week that the sideways bearish trend will not end if the Dax does not recover the 14,072 area and maintain it on a weekly level. Once again, that level has been a critical one.
If the price will remain above 14,072 in the weekly closing, we will see new rises and new historical highs. A new break to the upside of 14,127 and the highs of Monday the 15th of February are necessary. First targets are at 14,231 and 14,465.
On Monday’s open, the Dax needs to recover 13,887. Above this level, a pullback is possible with target 13,974 and then 14,012-14,040. We are talking about a pullback, not a reversal. High volatility can only encourage continuous high and lows. These areas will be monitored as well as 14,072 with expectation of bearish entries.
If the price opens below 13,750 without a quick reversal, price can aim for 13,650 again. From there, 13,620-13,657 area could become an import support range. If the range doesn’t hold, the next downward extension could be 13,373-13,289. These areas represent excellent opportunities for long re-entries provided that the US indices do not show bearish excesses and that the volumes are not too high. Otherwise shorts will be the preferred trade.
If the 13,373-13,289 area is lost, we have practically nothing until the yearly supports marked in December; 13,142 and 13,020. The possibility of a strong downward acceleration increases considerably if the price goes beyond the 13,000 points area. In this case, area 12,723-12,635 is the first relevant support so we cannot exclude the achievement of this area in one or two trading sessions. We also remind you that this area is a key support zone; a clear break to the downside of 12,500 points would open the door to further falls.
Key support levels are at 12,155-12,237 and 11,766. Below these levels, we should be gearing for a trend change. After the loss of 11,542, the first targets are in the 11,214-11,095 area. From here on, it is possible to extend down to 10,766-10,480, last touched on the 15th of May 2020.
US30 – The cyclical rotation has begun, the famous “reflation” trade, so it is not surprising that the Dow Jones reached new all-time highs. On Friday, inflation fears that kept bond yields high also hit the US index, causing a deep decline. Contributing to the Dow’s weakness were Apple Inc and Microsoft Corp, which showed their worst weekly performance in months.
The break of 31,521, followed by the 31,234-31,181 area, produced a potentially bearish price reversal, possibly lasting 2-3 weeks, possibly until the next rollovers in March.
As we had warned last week, the 31,521 level enabled a powerful uptrend which reached 2 out of the 3 expected targets (31,704, 31,833). If these levels are recovered this week, it can fuel a new rise despite facing a large resistance area created between Thursday and Friday; 31,741-31,986. Once this is surpassed, it may aim for the next target at circa 32,309 and possibly go further. Early pullbacks above 31,181 and 31,392 will be relevant for new shorts on the Dow.
On Friday, price closed on the support levels highlighted; 30,986-30,922. If prices do not fall again on Monday with strong volumetric pressure and increased volatility, these areas will be very useful to look for quick long entries. This could be especially the case with V-reversals.
The chess match is played around support set at 30,648. If this is lost, we will look for 30,476 and the more important 30,098-30,260 area. The loss of this last area will signal new strength within the bearish trend. If held, it could be a perfect area for new upward reversals.
The 29,618-pivot level will continue to determine the trend of the index in the coming weeks. Below it, we could see a violent bearish movement.
Only the loss of the weekly support 28,880-29,119 could put in crisis the annual bullish trend. Below it, we have intermediate support between 28,319-28,051. A close below 27,762-27,625 would undermine the current bullish scenario.
Area 27,019-26,650 is the area not to be missed. This area has been successfully tested and has led to strong bullishness. Sellers might come back strongly if the 26,110 level is broken to the downside. The decline could extend to the main low of July the 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. The very important annual support remains at 24,309.
IMPORTANT NOTE: US Treasury bond yields have confirmed excellent shorts this week. Be very careful with multiday longs. The market is under a lot of pressure and volatility due to the ongoing adjustments. They must be followed carefully this week. Keep in mind the levels given as a reference.
Have a good trading week!
Research provided by Giancarlo Prisco
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