DAX 30 Struggles to Consolidate Head and Shoulders Pattern, IFO Sentiment Data Improves

Key Talking Points:

• DAX 30 is struggling to break below the H&S neckline and risks losing bearish momentum to consolidate the pattern
• German IFO data comes in better than expected as the vaccination program lifts hopes for the summer months

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The DAX 30 is struggling to break below the neckline of the head and shoulders (H&S) pattern that is unfolding, weakening the bearish case for a break lower. The stochastic indicator has slowed significantly and is hovering above the 20 line that marks the oversold area, meaning downside momentum could be stalling and we could see an upside reversal before the H&S is able to finish its formation.

Market sentiment seems to have rolled over heading into a new week, with indices showing mostly in the red at the start of the European session. A cause for this may be that the expected effect from rising bond yields is finally materializing, making stocks look more expensive as sovereign bonds offer a higher return. This move out of fixed income had initially thought to benefit equities as we were seeing flow migration, but it seems that non-traditional assets such as cryptocurrencies and commodities like oil are picking up the trade flows spilling out from bonds.

This rapid rise in yields has also sparked the discussion regarding the Federal Reserve’s policy actions in light of this shift in economic expectations. Despite the Central Bank having reassured time and time again that there are no expected changes to monetary policy in the near future, investors have become wary that the chances of a rate hike in 2021 are increasing, leading equities to underperform given the possibility of less stimulus in markets.

The latest IFO data on business and economic sentiment was released this morning, showing that overall sentiment has improved in Germany in the month of February. Business expectations have risen to 94.2 from an upward-revised 91.5 in January, and beating expectations of just 91.8. The current assessment has also come in better than expected at 90.6, whilst business climate has increased to 92.4 from 90.3. This is a forward-looking indicator and it is likely that the current pace of vaccinations has caused optimism for the coming months to increase on the expectation of relaxation of social distancing measures.

DAX 30 Daily chart

The DAX 30 was gaining bearish momentum this morning but the release of the latest IFO data seems to have stalled further downside pressure for the time being, with current price hovering just above the H&S neckline (13,830). There doesn’t seem to be much conviction in today’s direction so I expect consolidation to continue dragging on between 14,000 and 13,800. A break above or below these boundaries could see momentum increase in an attempt to solidify a direction, although further upside seems to be strongly limited at this point. I still expect price to attempt to culminate the H&S pattern, although the strong resistance to further downside does limit the scope of the pattern, meaning that the bearish correction could only go as far as 13,600 before stalling.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin