Weekend Market Analysis - DAX, EUROSTOXX 50 and NASDAQ 100

The action at the stock markets in the previous week was pretty boring. The major indices in Europe and in the US went basically sideways in a very tight range. To me most indices remain extended and I personally think they are forming some kind of a top. The question is how deep the correction will be. I do not predict the correction during the remaining trading sessions in 2010 there is also the possibility that the markets will hold these levels throughout December.
The XETRA DAX formed a bearish engulfing pattern on Friday. If the DAX breaks down under 6945 the next stop will be around 6900. The bearish engulfing pattern must be confirmed by a break under Friday's low. Further the MACD created a sell signal.

The same is true for the EUROSTOXX 50 just the MACD is still positive. Nevertheless my retracement target around 2780 is still intact.

The NASDAQ 100 is still going higher with a very weak MACD and a declining Stochastic. Also the minimum wave target around 2230 was reached during last week. If we are breaking above that level I am expecting further buying.

Index Trading - Eurostoxx 50, DAX, ATX and SMI

The past two days nothing really happened.
The XETRA DAX formed two dojis on Monday and Tuesday and also today the daily pattern is indication some indecision. I am expecting a move back down at least to 6900 maybe also back down to the lower trendline around 6800. If this trendline does not hold the DAX will maybe retest 6350.

The EUROSTOXX 50 looks a little bit extended and maybe it is forming a shorter term top around 2850 to 2860. The 61.8% retracement of the last move up is around 2780. There is also another Fibonacci level around this level and I think we will retest this maybe even before Christmas.

The ATX stopped at a rising trendline which started at the high from October '09 and touched the high from April. The ATX looks overbought and I think a move back to 2700 is very reasonable.

The SMI is still forming a potential bear flag which looks similar to the action in the EUROSTOXX 50, but the EUROSTOXX 50 is consolidating in form of a bearish wedge. Today the SMI has formed a reversal candlestick and if the rising trendline around 6350 breaks we could see a fast move down to 5940.

Weekend Market Analysis - DAX, EUROSTOXX 50 and S&P 500

This was certainly a very interesting week on the stock markets. As always I want to take a look at the XETRA DAX and the EUROSTOXX 50 and also at one US-Index.
First the DAX on a weekly candlestick chart. As you can see the candlestick of the past week has a very small body and also the weekly range was just 120 points. That means that the range was less than 2%. Also on the weekly chart you can identify a rising trendline which limited the upside since 2009. I personally do not expect a break of that trendline and so a acceleration of the uptrend. Moreover both the RSI and the Williams% are showing overbought conditions. Nonetheless I would never trade such indicators itself because just price action pays you.
Moreover the 76.4% retracement from the high in 2007 to the low in 2009 is at 7075 points which is obviously not very well charted.

The daily chart of the DAX shows a nice rising trend channel since September. The upper trendline is around 7175 and the lower trendline just below 6800. As you can see the last highs of this week did not touch the upper trendline which is a little bit worrisome. In the medium to longer term I am still expecting a move back to 6350. Can the DAX reach the 7200 level before that? Certainly! Nevertheless I think for the long-term uptrend a retest of the breakout level would be very healthy. Other signs are the recently mentioned sentiment surveys. Short-term trader should play attention to the inside candlestick formed on Friday. In addition to the bearish engulfing candlestick on Thursday a break in either direction will be followed by further buying/selling.

The EUROSTOXX 50 seems also a little bit extended to the upside and is still under the resistance level of 2850. Nothing really changed on Friday. The index is in my opinion neutral but extended.

Now let's take a look at the 5-year weekly chart of the S&P 500. The downtrend since 2007 clearly broke in 2010. The index run into resistance around 1220 and retested the trendline. Since September the S&P had a nice bounce back up to resistance. This week the index broke through on a daily and a weekly basis. Nevertheless there is further resistance around 1250 and later around 1300.
In late 2009 and beginning of 2010 the RSI showed some divergences on the weekly chart which looks similar what the RSI on the daily chart of the DAX is forming nowadays. As you can see at the S&P divergences are just a warning sign and not a trading signal.

After another 5 to 10 points to the upside we could see some profit taking. Moreover when the S&P 500 reaches 1250 I think the DJIA will reach the former highs from November around 11450 again. So maybe a little bit of a correction could occur nonetheless the S&P 500 broke to new highs. Further the DJIA was forming a candlestick of indecision on the weekly chart.

Watch out what China does over the weekend because this will definitely have strong influence on the stock markets around the world.

Index Trading - Eurostoxx 50, DAX, S&P 500

In my opinion nothing really changed during the last few days. The EUROSTOXX 50 was forming a doji candlestick in yesterday's session. Moreover it is just around resistance around 2850. In the hourly chart the EUROSTOXX 50 is showing a bearish wedge which should break in one direction either today or on Monday. After this run I would bet that the break would happen to the downside but who knows. The bearish divergence on the RSI is still intact so if you are long protect your profits and watch out.

The XETRA DAX has formed a pattern of indecision on Tuesday followed by a bearish engulfing pattern yesterday on heavier volume. As I mentioned in former posts I am expecting a move to either 6800 or even 6650. Nevertheless you must have a proper money management and a stop above the recent highs if you want to trade that.

The S&P 500 is looking much better. If it either takes out Tuesday's highs or closes today (weekly) at least at yesterday's level I would get bullish on the US-Indices. Nevertheless also the US-Indices are looking quite extended to the upside and with such a bullish sentiment and the low Volatility-Index a move back to 1200 in the S&P 500 seems quite reasonable. If the S&P 500 closes at 1226 or below today the action would look like false breakout and the weekly candlestick would form a shooting star.

Market Analysis - DAX, EUROSTOXX 50 and NASDAQ 100

The action yesterday was not bullish at all. When the US-Indices opened their regular trading session everything looked like a breakout. But as I mentioned in my last post the intraday action is critical as well. Intraday all major US-Indices sold off pretty hard. They tried to bounce in the middle of their trading session but failed and closed at their lows and even more important back in their trading range, under their breakout level. Besides that the DJIA could not take out the November highs. In the weekend post I mentioned a rising trendline in the hourly chart of the SPY. The SPY broke above this trendline yesterday but during the last two hours of trading yesterday it fell back below it.

The German DAX also made another reversal or at least another candlestick pattern where you should be cautious. I am expecting at least a retest of the 6900 level and if it holds it could certainly go up further into year-end. Nevertheless I think the DAX will retest sooner or later the breakout level around 6350 at the latest next year.

The EUROSTOXX 50 also made a candlestick pattern which looks like the one of November 30th and from there on it bounced. Moreover the index did not close significant above the key 2800 level yesterday.

I do not recommend to short here but with the highs from yesterday you have some well defined stops with a nice reward to risk ratio. I personally do not like the idea to get long up here after this nasty intraday action yesterday. If you are already long you should protect your profits.

State of the Market - Indices

The overall tape looks very bullish! The EUROSTOXX 50 managed to get back above the key 2800 retracement level so the next target is around 2900!
Also the US-Indices are showing strength (Futures) and everything looks like a breakout. One very important thing has to be added, the US-Indices must close above the breakout level.
At the S&P 500 this is around 1228. Even better would be a nice intraday action with a steadily uptrend throughout the day.

Market Analysis - DAX, S&P 500 and VOESTALPINE

Nothing really happened on Monday. At the XETRA DAX you can see another indecision candlestick (inverted hammer).

As I mentioned in the weekend blog entry I am looking for a pullback back to 6650 to 6700.


The S&P 500 also did nothing yesterday. It was a low volume day and the hourly trendline which I emphasized in the post on Saturday was not hurt either.

The recently mentioned VOESTALPINE is going straight up maybe until the € 38 level.

Weekend Outlook - SPY, QQQQ, DAX and ATX

Despite the disappointing jobs report the indices closed in positive territory on Friday.
First let's take a look at the SPY (ETF which tracks S&P 500).
On the daily chart you can see the downtrend from April until July. This trend was retested around support at the 104 level in August. Afterwards the uptrend until November started. This uptrend broke two weeks ago and was retested during the last two trading sessions, like in August right around former resistance. That would be the bearish case for the stock market. The bullish case would be that the SPY retested the 50 day moving average around 118 and started the next leg of the rally. Technically we are at a critical level.

The hourly chart of the SPY shows the break of the upward trendline even better. Yesterday the SPY completed the retest and what is very important for every short-seller out there that none of the three big US-Indices took out the highs of November.

The QQQQ (ETF which tracks the NASDAQ 100) did not retest the former uptrend and is still forming a potential bear flag. Only if the QQQQ takes out the November highs this scenario is off the table.

The hourly chart shows that the QQQQ is at its upper trendline and seems to be a little bit overbought.

The German DAX and the EUROSTOXX 50 were forming a negative doji star formation with a long white/green candle on Thursday followed by doji candle on Friday.
Further the DAX is just around the long term upper trendline which is very strong resistance.
A break below 6650 would indicate a retest of the breakout area around 6350.

The ATX (Austrian Traded Index) also run into resistance around 2750 to 2800 and now is forming some kind of a broadening top which usually occurs after an uptrend and is a reversal pattern.

The higher participation of private investors typically is a sign of a market top. Many sentiment indicators are at multi-year highs. The German TecDAX sentiment indicator for instance shows 65% of the private investors are bullish and just 20% are bearish. The AAII-Sentiment Survey shows similar results and the DAX sentiment too. In conclusion I think it is difficult to push the stock market above these strong resistance levels with such a bullish sentiment.

As always, please feel free to leave comments!

NASDAQ 100 and Cisco Systems

The Nasdaq 100 is like the other US-Indices at a critical level around the November highs. It had two very strong sessions but the volume was not impressive. Furthermore the Nasdaq 100 is near its 2007 highs. That means very strong resistance ahead and after today's disappointing jobs report the futures are indicating a lower open. So could that be a potential double top? Yes definitely, but as I mentioned in a post a few days ago, the saver play would be to short if the lows of the last two weeks are broken.

The Cisco chart shows a long term sideways range. From the top 2007 till the low 2009 it had a  downtrend channel and since April 2010 Cisco also established a similar downtrend.

In a shorter timeframe Cisco could bottom out just above the $ 19 level. A fibonacci level is around $ 19 and also bottom trendline of the channel is just around $ 19. But that does not mean to get aggressive long because it could drift further down. On the other hand shorting is also risky too because it has support around $ 19 and is oversold.

Technical Picture of the Stock Markets - DAX, EUROSTOXX, DJIA and S&P 500

The German DAX finally managed to get above the 6900 level on a closing basis. Nevertheless the volume looks to be pretty low for a breakout-day. Moreover a very key resitance level is around 6960 to 6975 namely the trendline from October 2009 which limited every rally till now. Maybe we could jump above it just to test the psychological number of 7000 points but I personally think this trendline holds this time too. Another reason to be slightly cautious is that the DAX today lagged yesterday and today against the EUROSTOXX 50 whereas in the weeks before the DAX constantly outperformed the EUROSTOXX 50.

Also the EUROSTOXX reached a fibonacci retracement level which was also resistance in May and June. On Tuesday the index was much oversold so this bounce is not very surprising.

The breakout of VOESTALPINE AG worked pretty well so far and also if you got the S&P or DJIA breakout it could be time for profit taking.

Both the S&P 500 and the DJIA are reaching resistance around the November highs. A break there would indicate more upside. You should also consider in your trader tomorrow's jobs report, a positive number could certainly lift the market another leg higher.

In conclusion the four mentioned indices are all running into more or less strong resistance level which could be a shorting opportunity but a break especially in the US-Indices would indicate more upside even in the European Indices.

SMI (Swiss Market Index) and Nestlé (CH0038863350)

Let's take a look at the SMI (Swiss Market Index). The picture looks similar like the Eurostoxx 50 chart.

Since mid April the SMI dropped nearly 15% till July and since then it is forming a potential bearish flag (rising channel after a decline). On the one hand you could trade the channel with a well defined stop underneath the trendline or on the other hand you could trade a breakout of the channel to the downside.

The stock with the highest weighting in the SMI is Nestlé. The chart of Nestlé shows a nice breakout in November and now a retest of the former resistance level between 54 and 54.5 CHF. This is a very critical level because it is also the high of 2007. For further upside Nestlé has to hold this level.

The rising triangle would indicate a price target of 60 CHF.

As you can imagine with a weighting of approximately 23% the action in Nestlé is crucial for the SMI.

Indices Trading - Eurostoxx 50

For now it looks like the Eurostoxx 50 is breaking below trendline support. A clear singnal would be a close below the trendline today and maybe tomorrow a failed retest of this trendline. Why tomorrow? Because tomorrow is December 1st and on the first trading day of a month there is usually a bias to the upside.

If the Eurostoxx 50 can close above 2700 this week it could be a false break and as a result a strong bounce could occur.

Money Management, Position Sizing and Risk/Reward

In my opinion the most important thing is the risk-reward ratio of every trade. As a trader or investor you have to analyze markets to find opportunities. If you think you found such an opportunity then you have to set an initial stop level and a level where you think your stock/option/future is moving to; in other words where you want to exit your position with a profit. If you did that you have your potential risk and your potential profit/reward.

With these two numbers you can easily calculate the risk to reward ratio, so how many $/€ you are risking for one potential profit. The ratio should be at least 1:2, so for every $/€ you are risking, you can earn at least two $/€. By respecting that rule you need not to be right on every trade. Even better you do not have to be profitable on half of your trades.

Another very important rule is that you should not risk more than a percent of your total account in a trade. In numbers that means if you have an account with $ 100,000 your potential loss (initial stop) of a trade must not be more than $ 1,000. That is called money management and the most important rule of trading. You have to respect that rule or otherwise you will go bankrupt over time. In fact every trader will have ten or more negative trades in a row and as a result if you are risking too much on every trade your maximum drawdown will be too high.

In conclusion you must have a flexible position size. If you are always buying a stock with 10% of your account you will not get an initial risk of 1% or less. In that case you need to trim your position till it fits the 1% rule.

On this topic there is one great book "Trade your Way to Financial Freedom" by Van K. Tharp.

ATX (Austrian Traded Index) and VOESTALPINE (AT0000937503)

Today I want to describe the Austrian stock market a little bit closer and therefore I want to take a look at the ATX (Austrian Traded Index) and one stock of the ATX, namely VOESTALPINE.

The ATX contains 20 stocks with a very high weighting of the banking sector (~30%). The Austrian market is considered as a developed market with a strong exposure to Eastern Europe. That is why the ATX sold off hard in 2008 but also why the ATX was skyrocketing from 2003 to 2007.

Here a monthly chart of the ATX:

The EWO ETF is tracking this index. The next chart shows that the ATX is at a critical level. If the ATX breaks to the upside the next targets are 3200 and then 3600.

During the last few months the ATX was consolidating very nicely and was going sideways.

The ATX is just below its resistance level around 2750 to 2800 and a break below 2650 on a closing basis would indicate further selling and a break to the upside would indicate prices around 3200 in the medium term.

The Voestalpine is an Austrian steel producer. On Friday the company broke above the critical Fibonacci Retracement level and above its high from April. Here is the weekly chart of the Voestalpine. The next major restistance will be around the € 38 area.

Have a nice day and take care!

Indices – 28th November 2010

First I want to take a look at the German DAX 30. As you can see here the German market had a nice rebound since the March ’09 lows. Moreover you can see that the Fibonacci Retracement levels were working pretty well. On the weekly chart below the next overhead resistance is around the 7200 level.

 

Compared to the Eurostoxx 50 the DAX shows some relative strength, especially since Europe’s solvency crisis. 

 

The next chart is showing the DAX in a shorter timeframe with a rising trend channel. At the moment the lower trendline is around 6000 points and the upper trendline is around 6950. Furthermore the RSI is showing a negative divergence because the price is rising while the RSI is declining. Usually such a divergence is indicating that a correction will occur.

Nevertheless I would not short such a strong index before he shows some weakness. For me the index first has to gap above the upper trendline which is shown in chart number three. And if that gap up is combined with a doij candlestick, then I am looking to short the DAX if the breakout could not hold support of the upper trendline. The other short possibility is if the trend since mid-October in chart number 4 breaks. To short the DAX is nowadays very dangerous. In my opinion the Eurostoxx 50 would be the better short candidate.

 

Now let’s take a look at the Eurostoxx 50.

During the last year the index is trading more or less sideways, but the next chart shows why the index could be a potential short candidate.

 

 

This chart shows that the index is forming a bearish wedge and if it breaks it could go down pretty fast. As you can see the RSI showed a few weeks ago a bearish divergence before the Eurostoxx 50 declined.

In the very short term the index formed a bullish hammer on Friday. This could be a great swing trade on the long side with a well defined stop in form of the rising trendline.

The US-indices are also at interesting levels. During the last week and a half the Dow Jones Industrial and the S&P 500 were trading in a very tight range. In the DJIA the levels to watch are around 11200 and 11000 and in the S&P 500 at 1200 and 1172. If one of these levels breaks the indices will move further down or up in the direction of the break.

 

The next support on the downside could be around 10700 in the DJIA and 1150 in the S&P. On the upside the old highs would be resistance.

So that’s it for today! Good luck and take care. 

A quick reminder:

Everything posted at this blog is for educational purposes only and should never be conceived as recommendation for buying and selling anything. You must do your own research.