DAX 40 and FTSE 100 Index Technical Outlook: Biased Lower

German DAX Index, UK FTSE Index – Technical Outlook:

• The DAX index has fallen below key support.
• The FTSE 100 is breaking below a multi-month range.
• What is the outlook and what are the key levels to watch?

DAX TECHNICAL FORECAST – BEARISH

The German DAX index’s slide may have paused in the recent days, but it is too soon to conclude the end of the downtrend. That’s because the break last month below key support at the March low of 12430 has triggered a breakout from a triangle pattern, pointing to a fall towards 10400. Triangles are continuation/consolidation patterns, implying that the prior trend resumes once the breakout takes place. In the case of the DAX, the trend has been down since last year.

Furthermore, from last year, the index has been gradually shifting to a ‘lower gear’ within the uptrend. That is, the strength of the uptrend is diminishing, as shown by the breaks below the internal trendlines of a rising pitchfork channel from 2016. Nevertheless, from a structural point of view, the retreat from 2021 isn’t enough to suggest that the long-term uptrend has been terminated.

DAX INDEX Monthly Chart

Chart Created Using TradingView

Indeed, the index continues to hold within the long-term rising channel in place following the Great Financial Crisis. The lower bound of the channel comes in at about 10900, which could provide decent support for the current downswing. Moreover, the lower edge of the rising pitchfork channel from 2016 comes in at about 10150, which could be another source of support.

FTSE TECHNICAL FORECAST – BEARISH

The UK FTSE 100 index has been holding above crucial support at a horizontal trendline at 6840, but the risks of a break lower are rising. Any push below this barrier could trigger a breakout from a multi-month sideway pattern, pointing to a fall towards resistance-turned-support at the June 2020 high of 6512. The next downside threshold may be the February 2021 low of 6315. The price objective implied by the chart pattern works out to 5965. To be fair, such measured-move targets can be more of a broad guide and not a rule, although in some cases they do hold.

FTSE INDEX Weekly Chart

Chart Created Using TradingView

As price action gets confined within a range, volatility tends to shrink. Conversely, a breakout from the sideway range tends to push up volatility, similarly to what happened in 2017-2020 (see chart). The implication is that the pace of the index’s losses could accelerate once the breakout occurs.

On the upside, the index has fairly strong resistance at the early-October high of 7088. A break above this is needed for downward pressure to fade, at least temporarily. Beyond the short term, the FTSE 100 index would need to break above the 200-day moving average (now at about 7375) for medium-term downward pressure to be neutralized.

— Written by Manish Jaradi, Strategist for DailyFX.com