miroslava.micunkova's picture

Does bearish DAX mean an impending correction in global stock indices?

World stock indices show a high level of correlation and as such may bring an important implication to where we currently stand and where we might be heading. A major rally in equities has been going on since late 2011, accelerating a year later in 2012. The highest high on DAX was reached in June while S&P 500 & Nikkei both reached their highest levels in September.

DAX offers the most coherent technical picture, as the 10051 June rally peak has been followed by a 9891 lower top in September. This has already been classified as a bearish signal, suggesting a possible formation of a head & shoulders top. Completion can be confirmed by a decisive break of the 8913-8903 neck line. Adding to the pool of evidence for a bearish DAX scenario are the negative MACD (turned negative in September first time after a year) and broken 26 & 52 week MAs. Downside target based on a completion of H & S will point towards 7508-7756 area (50% retrace of 4966-10051/measured target).



Since hitting two almost identical highs at 16320 & 16374 (December / September weekly highs), Nikkei may be tracing out a major bearish double top. However, the bearish scenario is far from being confirmed, as we first need to see a break-down from a recent multi-month bull channel (at 15400), to trigger an initial decline to 14454 (23.6% retrace of 8239-16374) and 13996-13885 (February / April 2014 lows) to raise such fears. 




S&P 500 is looking at an impressive 3-year bull-channel (since late 2011), with a sequence of higher highs and higher lows intact. Over the past two weeks, the base of the bull channel and the 26 week MA have been successfully tested, retaining the bullish outlook. However, given the high correlation among the world stock indices, can the S&P 500 survive a possible deterioration in the equities around the rest of the developed world? History shows it can do that for a considerable period of time hence, we shall look at price action itself for confirmation. Break below 1905 late July lows may be viewed as such a trigger possibly initiating a sell off towards 1831 and 1660 in the medium-term.