Submitted by Dana Lyons

Like many equity markets globally, the German DAX is testing critical trend support stemming from the 2009 lows.

Another day, another mega-trendline being tested in the global equity markets. Considering the bevy of trendline encounters around the world, it has become Trendline Week here on the blog and on Twitter (@JLyonsFundMgmt). And we’re not talking about obscure markets either. For example, we’ve already highlighted critical support tests for the STOXX Europe 600and Japanese Nikkei 225 indices this week. Today’s featured trendline pertains to – the German DAX.

Considered the engine that runs the Eurozone, it is not surprising that the German DAX would strongly resemble the STOXX 600. As goes the German market, so goes the Eurozone, it is thought. And while there is probably a lot of truth to the notion, the 2 markets are not 100% in lock-step. As a matter of fact, Germany only has the 4th highest weighting in the STOXX 600, behind Great Britain, France and Switzerland. Also, consider the fact that while the STOXX 600 was in the process of making essentially a multi-decade Triple Top in the past few years, the DAX was consistently hitting all-time highs from 2013 to 2015.

That said, the similarities are unmistakable and Germany’s influence undeniable. Considering the charts, the DAX trendline is basically the same as the one we highlighted on the STOXX 600. Specifically it’s the Up trendline stemming from the 2009 lows that tracks the bull market of the past 7 years (the only difference is that the DAX chart is drawn on a log scale, which makes its meteoric rise even more impressive).

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The idea is obviously the same as with the STOXX 600. It is a trendline so let’s keep it simple and not over-analyze things. Above the trendline is bullish for prices. Below it is bearish. And presumably – assuming it holds – when prices drop to test the trendline, it is a “buy” signal.

Now, for you day-traders, we apologize but the actual trendline touch occurred 2 days ago, on Monday (we had to pick 1 market each of the past 2 days and we settled on the STOXX 600 and Nikkei). Therefore, if you were looking to trade the DAX for a bounce, you’ve already missed it as the index has popped close to 5% in the 2 days since. This is not to say the DAX cannot rally more. Indeed, while it is not our forecast, the trendline is significant enough to produce another strong intermediate-term rally, as it did following touches in 2011 and this past February.

FYI, on Monday, the trendline (an inexact art, btw) was in the vicinity of 9205, according to our work. The DAX hit a low that day of 9214…thus, another “random” victory for technical analysis voodoo.

So, is the trendline going to hold? Our guess is that, while it may hold temporarily, there is a strong chance the trendline is broken sooner than later. One thing we have discussed before is that the increased frequency of trendline touches is suggestive of a forthcoming break. The idea is that buyers are unable to bounce the index as high or for as long as they did before, so it is an indication of waning demand.

On the plus side, like the STOXX 600, the 38.2% Fibonacci Retracement of the 2009-2015 rally is nearby (around 9000). This level held in February and provides another layer of potential support. Unlike the STOXX 600, that February low was above the October 2014 low. Thus, the series of higher lows is still in effect, which is a positive.

That said, the dominant force on the chart is undoubtedly the post-2009 Up trendline. In the event that it is broken, those other factors may merely serve as speed bumps on the way lower. Furthermore, should that break occur, one can be assured that a falling German stock market will serve as a significant weight upon the rest of Europe, and possible the globe.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

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