DAX Index rally faces risk of stalling amid headwinds

THE DAX 40, or DAX Index, is a German stock market index comprising 40 of the biggest companies by market capitalisation and liquidity. It is widely considered to be a strong measure of German and European economic health. Since reversing from the troughs near the 12,000 level in late September last year, it has seen a steady rally back into bull market territory, with gains of over 20 per cent. However, faced with the current fundamental and technical headwinds, the rally could be at risk of stalling.

The German Consumer Price Index data released earlier this month for February missed forecasts, with fear of inflation remaining sticky as the figures surpassed expectations on both a year-on-year and month-on-month basis. The annual inflation rate remained at 8.7 per cent, higher than the forecast 8.5 per cent while the month-on-month inflation rate came in at one per cent, also beating the 0.7 per cent forecast figure. Hot inflation data suggests that price pressures could remain elevated for an extended period of time, keeping pressure on the European Central Bank to remain hawkish for longer than expected, which poses an additional threat to the already dim European growth outlook.

The equity benchmark was also not spared from recent risk-off moves as investor sentiment was soured in the wake of US regional bank collapses (Silicon Valley Bank and Signature Bank), with the DAX suffering its worst single day drop on Mar 13, 2023, since December 2022, and Commerzbank and Deutsche Bank taking big hits.

Based on a technical analysis, the DAX had held steady in a range until the breakdown last week, where the decline sliced through the bearish rising wedge technical pattern and the 20-day Simple Moving Average, making its way through the recent 15,200 support level with ease before settling near the 15,000 psychological level - a swing low support level in January this year as well as a key range horizontal support from April 2021 to February 2022. With the fresh technical breakdown, momentum has shifted towards the bearish camp. With the Relative Strength Index indicator not reaching oversold levels yet, this could open the door to further downside ahead.

The case for more potential downside ahead is strengthened with the bearish divergence seen on the Moving Average Convergence Divergence technical indicator where a lower high was recorded, while the DAX made a higher high during the rally, a discrepancy showing slowing momentum in the upward move. With the breakdown, the rally is at risk of stalling and the DAX could make a retracement back to the 50 per cent Fibonacci retracement level near the 13,800 level, which is confluent with the swing low support formed in December last year.

The writer is research analyst at Phillip Securities