DAX 40 showing first signs of possibly soon losing upside momentum
Last week’s lows are line in sand for short-term uptrend.
In the medium- to long-term it pays to invest in stock indices when they hit record highs
Last week the DAX 40, among several other international stock markets, hit a record high close to the minor psychological 19,000 mark before consolidating. But is now the right time to buy into the rally?
Even though many investors are getting increasingly nervous, after all US stocks hit a new record high 23-times so far this year, historical analysis shows that investing when the stock market is at an all-time high is a medium- to long-term profitable strategy.
According to an article written by IG Chief Market Analyst Chris Beauchamp “the US stock market hits new all-time highs more frequently than one might expect, with new records being set in 30% of months since 1926. On average, 12-month returns following an all-time high have been 10.3% above inflation, better than the 8.6% for periods not at new highs.”
He also states that “the impact of avoiding the market after new highs can be severely detrimental to long-term wealth creation.” Data from Schroders shows that an investment in the US stock market in January 1926 would have created a 7.1% annualised return by the end of 2023.
But is now the right time to buy into the Dax 40 rally?
Last week’s new all-time high in the DAX 40 has been followed by a bearish ‘Dark Cloud Cover’ on the Japanese daily candlestick chart which promptly took it down to last week’s low at 18,628. On the front month June DAX 40 futures contract an even more bearish “Engulfing” pattern was formed.
This in itself is not an issue but if a daily chart close below the 18,628 low (18,708 for the June DAX 40 futures contract) were to be made this week, at least a short-term corrective move lower is likely to be seen which could then be used to jump on the DAX 40 medium- to long-term bullish bandwagon at lower levels.
Daily DAX 40 Candlestick Chart
The fundamental reason for such a possible retracement lower rearing its head could be triggered by Federal Reserve (Fed) commentary over the course of this week with perhaps some members re-iterating the “rates higher for longer” scenario and pushing back rate cut expectations.
DAX 40 technical outlook
From a technical analysis perspective, the fact that on the weekly, daily and hourly candlestick charts negative divergence can be spotted, does increase the odds of a minor top being formed in the current strong DAX 40 bull market.
Negative divergence occurs when a new high on the underlying asset, in this case the DAX 40 hitting a record high last week, is not being accompanied by a higher reading of an indicator, such as the Relative Strength Index (RSI). When this happens, in more cases than not, at least a short-term correction against the trend usually takes place.
In the current DAX 40 example such a bearish scenario would only become confirmed if at least a daily chart close below last week’s low at 18,628 were to be seen (18,708 on the DAX 40 June futures contract).
Weekly DAX 40 Candlestick Chart
If this were to happen, the late-April high slightly above the 18,200 mark, the 55-day simple moving average (SMA) and October-to-May uptrend line at 18,140 may present a better medium- to long-term buying opportunity for investors than current levels.
All bets would be off if a new record high were to be made, though.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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