In today's technical analysis, our attention turns to the German index, DAX, which showcased a bearish shift in sentiment in its recent trading session. The chief culprit? An evening star candlestick formation. For those unfamiliar with this technical pattern, the evening star is a three-candlestick formation, often signaling a potential reversal from a bullish to a bearish trend. Given its historical significance, the presence of this pattern raises eyebrows about the forthcoming direction of DAX.
Delving into the specifics, the month of July wrapped up with the DAX at local highs, but it was the subsequent candlestick pattern that has garnered attention. This pattern, highlighted by a blue rectangle on many charts, comprises an initial bullish candle, followed by an indecisive doji candle, culminating in a bearish candle. For the evening star to be confirmed, the bearish candle must close below the opening of the initial bullish candle. And indeed, DAX’s chart met this criterion, marking the onset of its current downward trajectory.
Adding to the bearish narrative, DAX also exhibited a false breakout above the 16,350 points, a level marked in yellow. Historically, such false breakouts often precede bearish corrections, further underscoring the need for caution.
So, what lies ahead for DAX? Given the present technical landscape, a plausible target for the current downturn appears to be the orange horizontal support around the 15,700 points. This coincides with a significant purple uptrend line, which traces its roots back through lows from July, and further back to March and December 2022.
In the short-to-mid term, as long as DAX remains subdued below the yellow threshold, we can expect a bearish sentiment to prevail. However, any resurgence above this yellow barrier might serve as a beacon for bullish investors, signaling a potential reversal in fortune.