Great Graphic: DAX Potential Bottom?

Investors in the German stocks have been on a roller coaster this year.  Anticipating ECB's QE, and falling German yields, the DAX rose by more than 30% in the first 3.5 months of the year.   Since April, it has given it all back plus some.  It recorded the low for the year yesterday. 

However, the technical outlook may be improving.  First, we note that the recent losses have pushed the DAX to marginally overshoot the 38.2% retracement of the bull leg that began in late-2011.   That retracement is found near 9555, and the DAX has not closed below it on a weekly basis. 

Second, as this Great Graphic composed on Bloomberg illustrates, the DAX holding a weekly uptrend off that late-2011 low.  That trend line comes in this week near 9360.  It dipped below it yesterday on an intra-day basis, but finished above it.  

Third, we note that the DAX gapped higher today.  The gap is unfilled and the DAX is making new highs late in the session.   The gap is important for the near-term outlook.  Ideally, the gap is a breakaway gap and will not be filled in the near-term.  The gap is found between yesterday's high near 9536.60 and today's low just below 9597. 

Fourth, the daily RSI and MACDs are showing bullish divergence.  The news lows in prices yesterday was not confirmed by the technical indicators. 

There is the risk that today's price action is distorted by month-end and quarter-end positioning.  And surely the price action today does not negate the negative sentiment and powerful momentum.  Picking bottoms is always hazardous.   The DAX can prove itself by 1) not closing today's gap and 2) rising through 9950, which is a retracement objective of the decline off the month's high on September 9 near 10512 and dove tails with the 20-day moving average.  

The DAX is highly correlated with other European bourses.  Over the past 60 days, the correlation of the percent change of the DAX and the percent change of the Dow Jones Stoxx 60 is almost 0.97.   It rarely gets higher.   The euro is inversely correlated with the DAX (-0.42, 60-day rolling basis on percent change).  In the middle of September, the inverse correlation reached -0.52, the most since 2003. 

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