Where now for the DAX after November’s rebound?

‘Pinned’ might be the best way to describe this DAX, which has seen its huge post-March rally hit a wall at 13,300, and a 200-point trading range established since late July. It is true that we had a sudden dive to 11,300 in October, but the chance to pick up the index at a five-month low was too much to resist and the price was quickly back to the ‘brick wall’ area of 13,300.

A strong euro is not helping matters, but with a vaccine now in the works and an Asian recovery already underway, the export-focused German economy and the DAX itself have reason to be optimistic.

As noted in the daily indices updates, the index needs to break the 13,200 to 13,400 range to provide near-term direction, but given the general strength in indices, I suspect the bull case will prevail over the bearish one in the medium term, with little sign so far that the sellers can reassert control.

Seasonality is certainly on the side of the index, for the next three weeks at least. From there a tougher period looms, with a decidedly mixed outlook for January to March, at least on average.

With only 30 stocks in the index, breadth data isn’t perhaps as useful as it is for the S&P 500 or FTSE 100, but it would be unfair to not look at the data for the DAX in any case. The October slump took the percentage of stocks above their 20-day simple moving average (SMA) to their lowest level since March, but dip buyers came in and saw the reading go back to 80%. But rallies have tended to falter once the reading hit that level in recent months, so some weakness was to be expected.

But a more positive development has been that this drop-off, in short-term breadth, has not been accompanied by any major fall in the price itself. Instead, consolidation is the order of the day, and with breadth now edging out of ‘top territory’ and moving back towards the ‘buy the dip’ end it may be that the index is gearing up for a move higher into year end.

The sideways nature of the past few sessions is nicely captured below, where the percentage above the 200-day SMA has flatlined. But it remains at a strong level, although towards the top end of the scale. A reading above 50% usually puts the index back in bull market territory, so we should see a more positive view emerge here in the medium term.

Finally, looking at client sentiment, we can see that clients were furious buyers of the dip in October, as the percentage net long went to 75%. It then fell back, and clients were notably sceptical of the index’s ability to break 13,400 when it hit that level at the end of November. Since then buyers have come back in, with a reading of 40% a more measured figure. No doubt the lack of a clear direction contributed to this relatively neutral outlook.