Photographer: Ralph Orlowski/Bloomberg

There’s a Flashing Danger Sign for Germany’s DAX

A bearish technical signal is looming over the DAX Index’s record-breaking run.

The trend in the German equity benchmark is diverging from the one in a technical momentum indicator called relative strength index, a pattern usually seen as negative in technical analysis.

The RSI divergence occurs when prices make higher peaks, as the DAX has done in recent weeks, while the RSI makes lower highs, indicating that momentum is fading, even as prices keep going up. After a brisk rally in September, the DAX’s upward trajectory has lost steam this month, with lower trading volumes, and its RSI drifting lower.

“Investors have to be careful not to buy right now -- they have to put long positions on hold,” Valerie Gastaldy, a technical strategist at Day by Day, said by phone. “The speed, the momentum, is not supportive anymore. Prices are not falling yet, but they always lose speed before falling.”

The DAX’s bullish trend is still intact for now, Gastaldy said, but would be interrupted if the index breaks below 12,930, which represents a key support level.

While the RSI divergence pattern signals a potential pull-back for the DAX, any retreat could be limited, given the robust fundamentals for the German market. With Europe’s largest economy on track for a solid expansion in the second half and the euro -- a source of concern for exporters after its surge this year -- slipping from its peak in September, German stocks have been in fashion. The DAX closed above the 13,000 level for the first time on Monday, while still offering a huge discount to the S&P 500 Index based on estimated earnings.

    Quotes from this Article
    Before it's here, it's on the Bloomberg Terminal.