DAX30 & DOW JONES: weekly analysis 10 – 14 MAY

Market movers

The first week of May was characterised by high volatility, central bank meetings and the publication of important data such as non-farm payrolls. The data was well below expectations and this gave confidence to investors as it removes the spectre of hyperinflationary scenarios.

However, because of new all-time highs of the S&P500 index, we are experiencing a wider gap between stock market prices and its fair value. The market is really expensive and the Fed agrees with this view.

The bubble seems to have already burst as the most speculative assets are showing an irrational attitude that has already led to major reversals.

To get a strong signal on all the other sectors, we would have to see a generalised rise in yield curves coupled with a stronger-than-expected inflationary scenario. This would no longer justify higher stock prices unless earnings estimates continue to rise.

This week we will continue to watch inflation numbers, which will be published on Wednesday and not only for the US. This will allow us to see if the tapering speech can be brought forward.

On Tuesday Germany will publish the ZEW data whilst US retail sales will take place on Friday.

Analysis of the week and scenarios for DAX and Dow Jones

As indicated last week, the market came out of the interlocutory phase it had been in for several sessions. Despite the fact that many investors and insiders were talking about a decline coming soon, the stock markets confirmed its upward trajectory on Friday with new all-time highs for the S&P500 and Dow Jones. We might even add that the next two weeks might see even higher values. We might experience lows in the first sessions of this week and perhaps a close on Friday with further all-time highs.

We advise to follow every single session carefully, in order to verify that there are no conditions for a change in the weekly trend.

DE30 – Last week’s opening was characterised by price swinging back to our resistance at 15,269. From there, we saw a strong shakeout which brought prices to touch all our support areas; 15,119, 15,017-14,981 and 14,842.

The next day and just as sharply, the Dax started a pullback that brought prices back to all the previous support areas and closed on Friday above 15,356, a level which we have indicated to be maintained for new bullish strength.

The picture is very clear, if the Dax stays above 15,356 or recovers quickly; in case of a break-down the bullish strength will be confirmed. Above 15,464 the bullish trend may succeed in making new highs. However, it will have to hold this area well because, at this level, the offer has pressed with volumes. Weekly target area remains 15,665-15,755 with a possible extension to 15,900. The real target for the DAX is to reach the 16,000-16,200 area.

Support confirmed at 15,269. Weekly support is viewed at 15,119-15,062 area, which is difficult to reach as below it we might see new bearish pressure on a weekly basis. Key support levels are 15,017-14,981 and 14,842-14,804.

US30 – Thanks to the performance of giants Microsoft and Apple, cyclical rotation and excellent earnings expectations on value stocks, the Dow Jones reached impressive new all-time highs on Friday.

The range in which it had been wandering since mid-April was knocked down hard. The strength of the index was seen when it tried to touch the key support 33,725 in mid-week. The price reversed sharply reaching 34,161 and 34,351. From here, we reached our monthly targets 34,500-34,800. At this point 35,000 points level is very close. If we were to break them down strongly, a possible new weekly high is to be identified in the 35,500 area. It is not excluded that it could go further.

The new supports are placed at 34,706 and 34,502. The first one can lead to a quick correction; the second one has more buying and reaching it can lead to a new strong bullish movement.

Strong weekly support remains at 34,307-34,199, ideal area for multiday purchases. The 34,015 – 33,976 is the area not to be missed in order not to change the weekly trend.

The 33,725 can be considered a monthly support. Below this level, the annual trend of the Dow Jones might start changing.

IMPORTANT NOTE: The inflation data of this Wednesday might cause heavy shocks. Follow the price behaviour carefully. Avoid overtrading and watch out for the volatility of HFTs.

Have a good trading week!

Research provided by Giancarlo Prisco

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