DAX30 & DOW JONES: weekly analysis 15 – 19 FEB
Market movers
Last week’s market close showed differences in performances by sector. There were many positives in the Tech and Healthcare sectors, profit-taking in the cyclical sectors, industrial and even financial stocks.
Despite the lack of shortage in volume, markets looked a little dragged.
Statistics tell us that US markets have reached the same peak levels seen in the February-March 2020 sell-off. However, there is a very marked difference.
Whereas last year was dominated by risk aversion and panic selling, this year the peaks are created by the irrational euphoria of the retail world (and beyond) which seems unstoppable. The VIX is low and the spikes correspond to new highs on the indices.
The call options market shows this state of euphoria and the lesson from GameStop has been of no use as Reddit traders have returned to the markets in the hope of making up for lost ground.
To figure out how to navigate the coming weeks, we will need to look closely at sector allocation after the quarterly reports and the cash flows on those stocks that will have the most potential during the year.
The coming week opens with a series of very important macro data. It starts with Germany’s annual GDP followed on Tuesday by preliminary fourth-quarter estimates across the Eurozone.
The German ZEW index on Tuesday will provide data on institutional investor sentiment in the Eurozone’s leading economy.
In midweek, the European Central Bank will announce its monetary policy statements amid concerns over the covid-19 pandemic especially as the new more contagious variants of the virus spread threatens further restrictive measures with consequences for the economic recovery.
The week ends with the first preliminary estimates for February; it will include purchasing managers’ indices in the manufacturing and services sectors.
Analysis of the week and scenarios for DAX and Dow Jones
As we mentioned last week, the markets saw new all-time highs. On Friday, after an initial drop, prices recovered and closed at the highs of the day. This was the burst of momentum that we were waiting for to see new buying on the stock indices. If Friday’s was not a false signal, we could see a nice rise until the first week of March. However, it is important to keep in mind that there could be a strong correction anticipating any new rises until the summer.
DE30 – the German index opened last week with an overnight rebound breaking the resistance at 14,072 points. This time, however, the new all-time high marked a weekly high, leading the price to test all the support areas of last week 13,841-13,887/13,946-13,988. In the middle of the week, in the 13,841-13,887 area, the price made a bullish turn, closing on Friday above 14,072.
This level is of key importance, we will see new rises and new all-time highs if the price stays above it. A break to the upside of 14,127 and last Monday’s highs is necessary.
First targets are at 14,231 and 14,465. If the upward pressure continues, we calculate 600-700 points from 14,000 points in the next weeks.
On Monday’s opening we might see some corrective movements. If that happens, the areas 13,841-13,887 and 13,946-13,988 will still offer excellent points for long re-entry. We keep in mind that if the price does not hold the 14,072-14,000 points, the retracement could continue in the following days.
We can confirm the weekly support in the area 13,806-13,752. If this is lost, the index could record further declines. The next support is placed around the area 13,620-13,537. If lost, next extension will 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, the preferred scenario would include short trades.
If the 13,373-13,289 area is lost, we have practically nothing until the annual supports marked in December: 13,142 and 13,020. The possibility of a strong downward acceleration increases considerably if the price goes below the 13,000 points area. In this case, area 12,723-12,635 is the first relevant support and we cannot exclude the achievement of this area in one or two trading sessions. This area is a key support zone; a heavy 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 the latter, a trend change may certainly be on the cards. Should 11,542 be surpassed, the first targets are identifiable in the area 11,214-11,095; from here possible decline down to 10,766-10,480, a range which was last touched May 15th.
US30 – Monday’s opening of the Dow Jones, above the 31,181-31,234 area, confirmed bullish strength. This week the price reached new all-time highs and our first target in the 31,521 area. If the price stabilizes above it, we will target 31,833, with an extension to 32,309.
If 31,392 is lost, we may see the commencement of a weekly corrective scenario. Intermediate target at 31,234-31,181 should be the first support levels. After, we may reach the 30,986-31,922 area through 31,104 where we have seen strong purchases in recent weeks. If prices do not fall with strong volumetric pressures and increased volatility, the areas mentioned might be relevant if looking for new long entries.
We like support area 30,922-30,986 for pullback purchases as well as 30,476 and support area 30,098-30,260. The loss of this last area will signal to be careful about an inversion of the trend to the downside.
This is highly unlikely, but we might still see a small correction due to the strong rally. This will not change the trend but, if confirmed, could trigger a downtrend for 2 to 3 days.
The 29,618 will continue to determine the trend of the index in the coming weeks. Below it, we could see a particularly important bearish movement.
Remember that only the loss of the weekly support 28,880-29,119 could put the current trend in crisis. Below it, we have intermediate support 28,319-28,051. A close below 27,762-27,625 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 may come back strongly if the 26,110 level is broken down. The decline will extend to the main low of the 30th of July 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 24680. Very important annual support remains at 24,309.
IMPORTANT NOTE: a “healthy” bullish scenario has a low VIX and almost non-existent volumes. Therefore, it is advisable to look for supports or slow accumulation zones to buy and hold during the day with limited risk. If prices accelerate to the downside for several hours with increasing volumes and high volatility, short entries are a decent option even on a weekly basis.
Have a good trading week!
Research provided by Giancarlo Prisco
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