DAX30 & DOW JONES: weekly analysis 18 – 22 Jan
Market movers
US indices closed lower this week. The catalysts responsible for this bearish pressure came from concerns that the $1.9 trillion stimulus plan by President Joe Biden’s could lead to higher taxes for corporations and from falling bank share prices after major US banks released their earnings reports to kick off the US quarterly earnings season.
Biden’s stimulus proposal, unveiled on Thursday evening, includes about $1 trillion in direct aid to households and this has raised fears that the government will need to raise taxes on businesses to fund that spending. In addition, shares of JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co, which had seen a strong rally in the earnings race, were all down even though they reported better-than-expected fourth-quarter profits.
This week will be packed with political and macroeconomic events. Wednesday will see the inauguration of the new Democratic administration under Joe Biden.
Then, investors will closely follow macro data on economic trends, such as the upcoming monetary policy decisions of the major central banks.
It starts on Monday with China’s quarterly gross domestic product. The reference is to the last quarter of 2020, when Beijing still seemed immune to the second wave of covid-19. However, the situation will be monitored, given the presence of new outbreaks of the virus within the country.
We are having interest rate decisions from China, Japan, Australia, Canada and most importantly, ECB data and the press conference scheduled for Thursday 21st.
On Tuesday the 19th the focus will be on the ZEW index, the result of which may bring strong volatility in the European session.
Analysis of the week and scenarios for DAX and Dow Jones
Last week we pointed out that on the 6th of January the indices marked a new upward path. However, we also mentioned that the scenario could change if we have a day with strong bearish directionality, following at least 3 bearish sessions with high volatility. Friday’s close led to an explosion of momentum, offering clear bearish signals. These signals need confirmation in the coming week.
DE30 – At the open on Monday 11th, the Dax knocked down last week’s control level 14,025 testing Thursday and pushing hard towards key support levels.
At this stage, new uptrends will only be possible with daily closings above the resistance zone 13,946-13,988, from which we will aim towards the resistance level 14,072, the door to further historical highs. First targets are at 14,231 and 14,465. We remind you that the area 13,946-13,988 can be tested but without a convincing breakout it may only be a pullback.
If the first days of the week were characterized by very low trades, on Thursday and Friday the increase in volatility and volumes led to large moves on a daily basis. The weekly support in area 13,887-13,841 was broken to the downside with considerable strength. The loss of this area saw the testing of the next support at 13,752, touching 13,650. This was followed by the monthly support 13,551-13,480, with extensions to 13,373. On Monday we need to check for a possible bearish gap, which could lead the price to quickly test these supports and obviously understand its reaction. The monthly support range 13,551-13,480 is very important, weekly price closures below it open the door to strong declines. Similarly, the rapid recovery of 13,864, even with a gap up, could lead to new bullish pushes.
In case the price continues to fall below 13,373, we highlight the 13,320-13,300 support area. Here 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 beyond the 13,000 area. In this case the 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; breaking 12,500 to the downside would open the door to further falls.
Key supports at 12,155-12,237 and 11,766, below which we should be ready for a trend change. If 11,542 level is surpassed, the first targets are identifiable around 11,214-11,095. From here, possible extension may lead to 10,766-10,480, last touched on the 15th of May.
US30 – The lack of certainty over the full passage of Biden’s tax package outlined last Thursday, especially those parts with the greatest impact on household spending power, is leading traders to adopt a cautious stance. This caution is compounded when looking ahead to the negative effects on household purchasing power of the announced tax increase.
In short, operators are now taking positive news for granted and are focusing on uncertainties, while looking at the negative aspects for profit-taking or at least a pause in purchases.
Thus, the Dow Jones during Friday’s session cleared 30,922 to the downside and rested perfectly in the 30,715-30,648 area. Here, it rebounded sharply and the trend will only return to the upside above 31,181, with a strong recovery of 30,822. Bullish pullbacks should be watched carefully, to avoid running into false uptrends.
If 31,181 level is broken, first targets are 31,521 and 31,833 with a possible extension to 32,309.
The price will move primarily between 30,887 and 30,421. Outside of these extremes we will be able to discover the weekly direction.
The weekly trend will remain bullish if the support area 30,232-30,098 is not broken down.
A sustained movement below 30,098 will indicate the presence of sellers. The first target is 29,964, followed by 29,820. If 29,820 fails as support, 29,751 will come into the sights of sellers. From here possible extension to key support 29,618.
29,618 will continue to determine the trend of the index in the coming weeks.
In case the weekly support 28,880-29,119 would fail the test, we are ready for a trend inversion. Below it we have the 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 the 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 down. The decline may 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 24,680. Very important annual support remains at 24,309.
IMPORTANT NOTE – This decline is a short term trend and the price can turn upwards at any time. The weekly close will give us more information; therefore false signals will abound during the week. Forcing the trade is dangerous, so beware of sudden changes of direction, especially in the overnight market.
Research provided by Giancarlo Prisco
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