DAX Creates Head and Shoulders Pattern

Markets can’t find a direction, movements are rather choppy and it’s hard to talk about any strong, dominant trend. Buyers are preferring to stay away right now, giving more space to the bears. All this falls in line with a very handsome setup on DAX, that I’d like to present to you in this analysis.

DAX chart

The last three weeks on DAX, allowed the price to create a very beautiful Head and Shoulders pattern (green). I assume it’s less beautiful for buyers (as it promotes the downswing) but even they have to admit that the pattern’s drawn really technically. Top of the head bounces off the all-time highs and the neckline (yellow) is a horizontal support which, at the first half of December, was a crucial horizontal resistance.

The bad news for buyers is that today we managed to break that support, which in theory gives us a proper sell signal. The potential target for this is on the absolutely crucial long-term support around 14900 points (orange). In theory, we should suspect that the price will get there in the next few weeks.

That sets a bearish tone of course. From a technical point of view, that bearish signal could be cancelled, if the price comes back above the neckline or today’s breakout happens to be a false one. There’s always a chance of that happening, so before making any decisions, one should make sure that the bearish breakout is legitimate. Closing a day below the yellow support would help but also the next daily candle with lower lows and highs would confirm the breakout.