Key Talking Points:
- DAX 30 looks set to break lower as current price sits just above the neckline of a head and shoulders pattern
- PMI data fails to provide more insight, services slightly weaker than expected but not surprising given continued lockdown measures
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The DAX 30 continues to struggle to push above recent all-time high as bullish sentiment cools in equity markets. Overbought conditions had been showing for some time and investors were getting weary about an overheating stock market, which has caused some flows to be diverted to less typical assets like cryptocurrencies in an attempt to protect returns from rising yields and expensive stocks.
This week’s correction is small compared to the rise seen at the beginning of February, but it has done enough to reset momentum indicators and make the DAX seem more in line with fundamental valuation. That said, there is still broader uncertainty in the markets and a quick glance at the daily chart seems to suggest a small head and shoulders pattern in play, which could bring further downside pressure if rice break below the neckline at 13,830, which is also the highest price we saw exactly one year ago when the pandemic meltdown started on February 20th.
DAX 30 Daily chart
If we were to see this pattern unfold, expect the DAX to head towards monthly lows around 13,350, although some analysts are calling for further weakness towards the 13,000, at which point the German stock index would begin to look more fairly valued and would attract new buyers. Alternatively, a push above 14,140 would cement a further bullish run towards 14,500.
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PMI data mostly as expected
The latest PMI data was released this morning, showing that manufacturing continues to be the strong industry in Germany in the month of February, whilst the services sector continues to struggle, coming in at 45.9, below the 50 line that marks contraction and below expectations of 46.5. Whilst this weakness was expected given the country has been under strict lockdown measures since December, the overall reading was stronger than expected, mostly because of the strong manufacturing data.
The DAX was mostly unfazed by the data but given the current rate of vaccinations worldwide it will be interesting to keep an eye on the services PMI in the months to come, as we expect there to be an inflection point and strong readings above 50 as the economic outlook improves in the short-term. The German services PMI has been below 50 since October 2020 once the effect of the summer season started to fade and stricture measures were put in place.
German Service Flash PMI
— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin