Originally published by guppytraders.com
All eyes are on the Brexit train wreck when Prime Minister May stumbles from crisis to crisis. There is an understandable focus on food scarcity, declining medical supplies and the prospect of rapidly accumulating mess, as these exports to Europe are forbidden. The company exodus is increasing and more British companies are coming to the continent.
What is less studied is the Brexit impact on Europe. It offers a good proxy for this impact and reinforces the importance of patterns in the long term.
The first function on the weekly DAX chart is the long-term head and shoulder pattern. The head and shoulder pattern is a reliable card pattern that indicates trend reversal. It is also used to calculate trend reversing tests with a high degree of accuracy.
The first shoulder was formed in June 2017. The head was confirmed in January 2018 and the right shoulder in June 2018. It is a very broad pattern but offers a solid strategic analysis.
The neckline is drawn over the lows of 2017 and 2018. The value is projected downwards to give a target in the neighborhood of 9950. This suggests that the current rally is part of a long-term downtrend, so traders will be ready to go short as the collection of stalls.
Further investigation of the DAX reveals that the DAX is very compatible with the head and shoulder pattern and this gives increased confidence that the goals can be achieved.
The DAX developed a strong inverse head and shoulder pattern between September 2015 and July 2016. The distance between the head and the neck was measured and projected upwards. It gave a target of 13.100. It took 17 months to reach the upward goal, but the target was reached. The compatibility and suitability of this pattern analysis for the DAX has been confirmed and this gives confidence that the same pattern analysis will be equally accurate.
Markets fall faster than they rise, so instead of waiting 17 months for achieving goals, chances are that the current downward targets will be achieved within 6 months. Brexit in all its slow-motion chaos is the driving factor.
This strategic pattern analysis suggests that traders trade the current rise as a temporary rally and remain ready to confidently go short for a downward target near 9950.
Daryl Guppy is a leading expert in the field of international financial technical analysis and special consultant for Axicorp. Guppy regularly appears on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These comments are for educational purposes only and provide an example of applied technical analysis.
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