Originally published by guppytraders.com
All eyes are on the Brexit train wreck as Prime Minister May stumbles from crisis to crisis. There is an understandable focus on food shortages, diminishing medical supplies and the prospect of rapidly accumulating rubbish as these exports to Europe are banned. The business exodus is accelerating with more UK companies shifting to the continent.
What is less examined is the Brexit impact on Europe. The DAX provides a good proxy for this impact and reinforces the importance of long-term patterns.
The first feature on the weekly DAX chart is the long-term head and shoulder pattern. The head and shoulder pattern is a reliable chart pattern that indicates trend reversal. It’s also used to calculate the trend reversal targets with a high degree of accuracy.
The first shoulder was formed in June 2017. The head was confirmed in January 2018 and the right shoulder in June 2018. It’s a very broad pattern but it provides a sound strategic analysis.
The neckline is drawn across the lows of 2017 and 2018. The value is projected downwards to give a target near 9950. This suggests that the current rally is part of a longer-term downtrend so traders will be ready to go short as the rally stalls.
Closer examination of the DAX reveals that the DAX is very compatible with the head and shoulder pattern and this provides increased confidence that the targets can be achieved.
The DAX developed a strong inverted head and shoulder pattern between September 2015 and July 2016. The distance between the head and the neckline was measured and projected upwards. It gave a target of 13,100. It took 17 months to achieve the upside target, but the target was achieved. The compatibility and suitability of this pattern analysis to the DAX was confirmed and this gives confidence that the same pattern analysis will be equally as accurate again.
Markets fall more rapidly than they rise so rather than wait 17 months for targets to be achieved there is a high probability that the current downside targets will be achieved within 6 months. Brexit in all its slow-motion muddle, is the driving factor.
This strategic pattern analysis suggests traders trade the current rise as a temporary rally and remain ready to go short with confidence for a downside target near 9950.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.