DAX: Draghi pulled the rug out from under the bulls

<p>It’s been a harrowing trip for global markets today, and ECB President Mario Draghi was the conductor. First traders were impressed by the size and […]</p>

It’s been a harrowing trip for global markets today, and ECB President Mario Draghi was the conductor.

First traders were impressed by the size and scope of the ECB’s aggressive actions to ease monetary policy, but the market’s collective view shifted to dismay when Draghi later indicated that further rate cuts were neither anticipated nor needed. As my colleague James Chen noted earlier today, While not as disappointing as December’s under-delivery of easing actions, the press conference essentially amounted to a forward-looking disappointment due to Draghi’s relatively strong comments regarding future rate cuts.”

This reevaluation shifted all markets immediately from a risk-on to risk-off posture, leading to a big selloff in the US dollar, commodities, and equities. As my colleague Fawad Razaqzada noted in regards to the S&P 500, “given the technical importance of [the 2010 resistance] area, a sell-off here looked almost inevitable. So, at this stage, traders need to be open minded to the fact this could just be a short-term pullback rather than the start of another major leg lower.”

A similar move is playing out in European stocks, highlighted by Germany’s DAX index. While not quite as well-defined as the resistance area in the S&P 500, the DAX has reversed off a key round number / Fibonacci resistance zone of its own in the 10,000-10,060 range. Like the S&P 500, the German bourse is also forming a large Bearish Engulfing Candle* of its own, signaling a big shift toward selling pressure that could carry over into next week. Meanwhile, the daily RSI remains in negative territory (<60), signaling some medium-term skepticism toward the DAX as well.

From here, the next meaningful support level to watch is at 9,300, where the index consistently found support last year and even in January of this year. If that level gives way, a continuation down to the 18-month low near 8,700 could be next. As it currently stands, the bears will maintain the near-term upper hand as long as the DAX holds below 10,060.

*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.

dax3-10-2016 1-16-56 PM

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.