DAX 40 and FTSE 100 Index Technical Outlook: Weakness Ahead

DAX, FTSE, German DAX Index, UK FTSE Index – Technical Outlook:

• DAX has just broken out of a bearish pattern.
• FTSE is breaking below a multi-week range.
• What is the outlook and what are the key levels to watch?

DAX TECHNICAL FORECAST – BEARISH

The German DAX Index has broken below key support, pointing to further decline in the coming weeks. The break below key horizontal trendline support at about 12350, has triggered a breakout from a triangle pattern – which are continuation patterns – implying that the previous trend resumes once the price breaks out from the range. In the case of the index, the previous trend was down. Based on the width of the triangle, the price objective works out to about 10400.

The medium-term trend has been down after a head & shoulders pattern was triggered earlier this year. If history is any guide, the 2020-2022 uptrend has reversed to sideways at best following the subsequent break below the early-2020 high. The current pattern is similar to the 2015-2020 price action – a head & shoulders pattern followed by a break below the previous high – resulting in a multi-month sideways range.

In the previous episode, the index fell all the way towards the previous (2016) low. This time around if the triangle objective is indeed met, the probability of a move towards the 2020 low would rise. Interim support is at the October 2020 low of 11450, followed by the April 2020 low of 11235. On the other hand, for the immediate downward pressure to begin fading, the index, at minimum, would need to rise above the horizontal trendline at 12350.

DAX INDEX Weekly Chart

Chart Created Using TradingView

FTSE TECHNICAL FORECAST – BEARISH

The UK FTSE 100 Index is attempting to break below crucial support, raising the risk of an extended decline in the coming weeks. This follows failed attempts in recent months to break above major resistance on a horizontal trendline from 2018 at about 7800.

The index looks set to close this week below a horizontal trendline, which marks the lower edge of a channel from February, now at about 6950. The upper edge is a horizontal trendline from January, now at about 7665. A clean break – at least one weekly close – below the support could pave the way towards 6300, coinciding with the objective of the pattern based on the width of the channel.

Moreover, breakouts from sideway/consolidation patterns can at times be quite sharp as the market searches for a new equilibrium. Not too far in the distant past, a breakout from a two-year sideways range triggered a violent crash in March 2020 (see chart).

For now, there is initial support at the March low of 6788, followed by the June 2020 high of 6512. On the upside, UK’s benchmark index would, at minimum, need to break above immediate resistance at Tuesday’s high of 7074 for the downward pressure to ease.

FTSE INDEX Weekly Chart

Chart Created Using TradingView

— Written by Manish Jaradi, Strategist for DailyFX.com