Dax – Double Top

Despite a couple of big selling sessions this month the German 30 CFD, like the Australia 200 has clung on without breaking major support.

However, yesterday’s big reversal candle leaves what might be a double top. This could make the next couple of trading sessions interesting.

Daily Chart

German 30 CFD - Daily. Source: CMC Tracker

German 30 CFD – Daily. Source: CMC Tracker

This double top comes at what could be the end of a 5 swing advance. With price well above the 200 day moving average there’s scope for a decent sized downward correction if the support does get broken.

This situation is very similar to the oil set up, I posted on 18 February. The stop loss and entry and stop loss strategies on this chart follow the same logic, I outlined in the oil post. I won’t repeat them here but you can easily get details by clicking on the link.

The strategy of waiting for price to break under the low between the 2 double tops is supported by research. Thomas Bulkowski published exhaustive research on stock market pattern performance in his book “Encylopedia of Chart Patterns”. Here he noted that in bull markets, prices will actually rise 65% of the time and not drop through the confirmation line following a double top. The higher probability of trend reversal only comes into play once the confirmation line is breached.  Even so early entry can sometimes be effective with tall patterns and good divergence but that’s a story for another day.

Another common technique with this type of strategy is top apply a price filter, waiting for price to move well below the trigger line before entering and above the resistance before stopping out.

Depending on the filter you apply, an order ticket for this strategy, using a boundary on the stop entry might look something like this

CMC Tracker Order Ticket

CMC Tracker Order Ticket

If there is a setup, I’ll post a follow up discussing approaches to profit objective and trailing stop losses.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , , , , , . Bookmark the permalink.

4 Responses to Dax – Double Top

  1. dv34 says:

    I agree, monthly has alternate bat pattern at a supply level, looks good for a short to at least 7116-7167 (7116 monthly 38.2% retracement of cd leg/ 7167 is a weekly demand level/ trend line

  2. Apt Capital says:

    Hi Ric,
    I have applied the same trade logic to the CAC (French40). The same pattern shows.

    These trades are interesting on a fundamental basis too, as if things go bad, the DAX will fall, but if things go really well for Europe (looking unlikely!) the DAX may also fall relative to other European markets as capital is reallocated out of “safe” Germany into other EU country equities.

    So if one thinks there is a risk that Europe will improve, one could short the DAX and go long a riskier EU country to bet that DAX underperforms.

    If one thinks Europe will deteriorate then one could “supercharge” your DAX short by adding a CAC short as France is the most vulnerable looking EU country (that is, the most overvalued).

    • Ric Spooner says:

      Thanks,

      I hadn’t looked at the CAC (French 40). Your pairs thinking seems entirely logical to me. Building on that, an approach for the more conservative trader under the European deterioration scenario could be sell CAC, buy DAX assuming they may both fall but with the CAC underperforming?

      Regards
      Ric

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