The long term Dax chart looks to be one of those situations where a steep trend has been broken with the prospect of a move down to support at a longer term more conservatively angled trend line.
Against that background, the daily chart is forming a head and shoulder pattern. While this may have a bit more work to do, a break below the neck line even at this stage would qualify as a completed pattern and a setup.
The most recent steep green trend line has been broken. In these circumstances it’s not hard to imagine a move back to the longer term blue line. This has the sort of 45 degree angle that is easier to maintain over the long term.
The fact that the slow stochastic (box below chart) is trending sharply lower adds to the impression that a correction is underway. A move back into the oversold zone below 20% could easily be associated with price getting back to its longer term trend.
The fact that the latest major swing higher looks to have completed a 5 wave advance adds to the potential interest of this setup.
Given all these circumstances, the pattern on the daily chart looks close enough to a conventional head and shoulder to justify placing a stop entry sell order under the neck line at this stage.
Here’s an example of how that kind of strategy into may look using Trackers’ order ticket.
While a break below the neck line now would trigger a setup, a more interesting scenario might be if we do a bit more work to the upside before forming the right shoulder.
I’ve sketched this sort of scenario on the daily chart. Pattern traders may look at this development as being even more attractive because:
- The pattern would look like a more conventional head and shoulder where both shoulders look similar i.e. at about the same height and having similar width
- There is the possibility of an “abc” set up which could give a logical reason for an early entry close to the shoulder and well before a break of the neck line. This could mean getting in closer to the stop loss level and further from the profit objective it the trade worked.
Of course if none of these things happen, and we just rally up past the “head” from here, there is no setup
I’ll post a follow up on strategy if the neck line breaks or we look like developing a right shoulder at higher levels.