DAX and SPX Weekly Analyses, Jan 26, 2020

Down week on US indices, thanks to the news driven selloff on Friday. The biggest red daily candle in entire up move from October. Now we are heading into the most important week earnings wise for US markets. FOMC Statement and Press Conference on Wednesday. Data and Earnings releases in the table below.

No doubt that Apple, Microsoft, Facebook and Amazon are the most important earnings for US markets, and SAP will start DAX components reports.


For some time, stock markets are news driven - Phase 1 of US-China trade deal is signed, Iran scare is over, earnings are coming. US indices are very stretched, and as written last time in previous Weekly Analyses from Jan 19 - SPX was in the "Don't worry be happy" mode. To keep moving like this, markets need constant flow of good news, and strong earnings. Until coronavirus scare.


What is necessary requirement in recent years for correction, you may ask. It was always been a combination of technical and fundamental factors. Overbought market even with technical setup would likely make just a dip, but for corrections - we would usually need combination, like false breakout above prev. ATH + some fundamental factor.


Do we have technical reasons for a correction, and can the coronavirus be the missing ingredient to push the markets?

IMO - It is possible. Technicals to observe on the charts below.


Chart #1 - SPX Cash Index Daily


Two cash index gaps less than previous week, but stil 15 of them since October lows. Swing up is marked with triangles and fibs are made on that move. Visible important areas of support are: first one around 3210, then confluence between 38.2 and S level 3155. Then 3070 and ~3030. Remember that a 100 point drop on SnP is just 3% move. And there was 500+ points to the upside since Oct 3rd 2019. Four months inside the up sloping channel.


Chart #2 - ES_F 60 min


Since one day can't make a trend, we need that channel breakdown for more downside, but before that, sellers need to break and HOLD below Friday low. So - not just to poke below, but to HOLD below it. Let's zoom that using futures. For daytrading, there would be more zones, and on lower time frames. This 60 min chart is illustrative to observe key areas. After holding below Friday low, next task would be to break below 3260 and the trading channel.


Real breakdowns usually come on increased volume AND increased volatility.


Chart #3 - VIX Daily


VIX is still stuck below downsloping trendline, so break above it would be bears friendly.


Chart#4 - Facebook Daily


Last week, I showed Apple chart, one of the most stretched charts currently. Now we can observe Facebook also - since there are repetitive market behaviour on this chart. Like market reactions on DMA200, and how market HOLDING above the gap up after one of the earnings reports. OR, how when market gaps down 20% after earnings (July 2018), it takes time to go back to that level. Also, current possibility of false breakout. Very strong Earnings required to move higher. Always know where your risk is.


Moving to German market now.


Chart #5 - SAP Daily


SAP is the biggest DAX component, with 10.3% index weighting, which means it can have heavy influence on DAX at least short term, and first one to report Earnings (on Tuesday).


This chart is rich in various examples. Like making a new ATH in Sep 2018, after few attempts to break resistance, while making higher lows - classic building pressure for a breakout attempt. But this one failed miserably, making an upthrust. (Example of a so far successful breakout with same pattern is XJO - Australian index ASX 200). Reminder that every breakout attempt can either succeed or fail, that there is not a single pattern that works all the time, so we must accept the ambiguity of trading.


On the same chart: Axis lines (support turned to resistance and vice versa). Holding above the #1 earnings gap. Springs below former resistance, inline with halfback of Jan-July 2019 up swing. And finally - a megaphone, just like DAX has. PA on charts are not random. Like on previous chart - very strong Earnings report required to make new ATH. Very strong up day on Friday.


Chart #6 - DAX Cash Index Daily


While on Weekly chart (check that on your own) there is room to the upside and to the downside, on Daily chart DAX was banging at upper channel trendline for some time. More than a 2.5 months. Then former ATH resistance came to play. Finally made a new ATH, but with the weak breakout. Gap up, gap down, gap up... let's see a bit wider picture, but on blanko chart this time.


Chart #7- DAX Cash Index Daily blanko


It took two years to make a new ATH on closing bases for DAX cash. Observe megaphones, the one from 2018 and the current one. Then observe the time that market spend in first one, and in ranges that was made before large moves. Lots of shaking and pressure building before a decisive move. Plenty of TIME.


DAX is at resistance. It has made a false break above prev. ATH - but we didn't got a downside follow through. In fact, we got a gap up on Friday, and a strong day for DAX.


Back to the question from the beginning of this blog:

Do we have technical reasons for a correction, and can the coronavirus be the missing ingredient to push the markets?


We have technicals - but PA / CHARTS need to confirm. According to IG markets Weekend quotes, there will be gap down on Monday. Friday low on both SPX and DAX will be the one to watch. Earnings will be the factor especially if the coronavirus doesn't make a big spread.


How was it before, on previous virus outbreaks? I have found interesting chart from Steve Place (twitter handle @stevenplace), about Ebola 2014 pullback. Chart is in his tweet. Similar drop nowadays, and SPX could go to 3,000. Of Course, many supports before that, like written below Chart #1. News driven moves tends to retrace, and after Ebola case, there was a great rally.


In Morning notes from Thursday, Jan 23rd, I wrote: "Now imagine what a mere 2-3% correction on SPX could do to DAX which already has a failed breakout behind." Again, for both markets - CHARTS need to confirm this POSSIBILITY. On DAX, real show can start on decisive breakdown of 13,380 support. On SPX, below 3260.


Imagine a different scenario - market dips and then a few days later - no new coronavirus cases, FAANGMAN stocks with good earnings, and "they" squeeze sellers yet again. Break and hold above ATH levels would mean game over for bears, and back to BTFD environment. Don't fall in love for scenario that suits you or your portfolio better.


More coronavirus cases confirmed, especially in US, where only 3 case is confirmed so far, would change things. This is the case that can present a potent mixture of overbought market + fundamental factor. Then we will observe supports and market reaction on them, volume, and volatility. This scenario would mean expansion of daily ranges, and present a high opportunity market, the one in which we can have bigger winners. HIgher volatility -> bigger daily ranges -> more opportunities -> potential for bigger winners. Also - two sided activity on SPX and NDX. NDX is even more stretch than SPX. Check NDX and Apple charts. Bigger stops comes with this also. You can't use the same stop size for SPX Daily ATR of 25 and of 50 handles. Same goes for every other market. You NEED to know usual daily range of the market that you trade and to adjust your trading to contraction or expansion of it. So, eyes wide open, sharp, focused and ready - prepare yourself for the coming week.

 

In short term trading it is very important to properly understand context heading into every day, to know from which side wind is blowing - who has the short term control, and which side will be forced to liquidate IF and WHEN market hold above or below a certain level. What is the level of volatility, what can we expect from any particular day, what market already done in premarket session, what possible setups can be available, and so on... the things that we constantly learn in the DAILY DOSE OF DAX.


Cheers, StrayDog