As so often happens, a lot of markets have reached key technical levels in the run up to the US jobs numbers tonight (Australian time).
For traders using technical analysis, this has the advantage of providing a logical place to position a stop loss order. Knowing in advance what the risk is likely to be, allows traders to filter trading opportunities. This approach involves taking only those trades with a good enough profit opportunity in relation to the risk being taken.
The Dax looks to be one of those markets parked at a key technical level in advance of tonight’s figure.
To me the break below the peak labelled “3” early in April was a sign of weakness suggesting the possibility of a major downward correction.
While the market bounced off the 200 day moving average (green line), it has so far been a fairly shallow correction. It’s yet to retrace 38.2% of the last major move. Shallow corrections are entirely possible, but it’s more common for them to get down to at least the 38.2% range before they end. So a deeper correction is still a distinct possibility at this stage.
It’s interesting then to see that the market is currently parked at the resistance now created by the old support line.
If the market does show signs of stopping at this resistance by completing a trend peak here (higher high surrounded by 2 lower highs followed by a move lower), then this peak can be used to position a stop loss on short selling strategies.
A typical approach would be to place a stop just above the trend peak. Once a peak is made, a move higher indicates failure of any sell strategy based on a new downtrend.
This often depends on the type of trader you are. Do you have preferences for short or long term? It also pays to keep in mind that smaller profit targets compared to dollar value risked also need strategies that are successful more often if you are to be profitable over time.
One approach for shorter term traders may be to target a return to the old resistance line (pink trend line) which may now form new support.
Longer term traders may build strategies around a return to the 200 day moving average or a deeper retracement to say the 50% retracement level.
There are many different alternatives here of course. One general approach, is to enter only if there is actually a peak at (or close to) the trend line.
Longer term traders may prefer to wait for a close below yesterday’s low (arrow on the chart) to confirm the trend peak. This has the advantage of letting the “dust settle” after the NFP.
Those who prefer to be asleep at that time may place a stop entry with a decent margin below the arrow at yesterdays low.