DAX Market Analysis

Here are some key factors regarding the DAX and it's likely short/medium term movement.

To start with, we'll take a look at the DAX vs. German Bonds (Bund future inverted), these two assets are very highly correlated intra-day and in recent weeks they have diverged, this is key as it means there is a high chance that they will recouple. this being said the bunds "price in" a 7000 DAX or does the DAX "price in" ~1.6% 10y Yield.

White - FDAX Purple - FBund. Thomson Reuters.

For this reason it is reasonable to short the DAX, currently at 7610.00 and at the same time sell the Bunds at 144.85, These will likely converge in the area of 7300 DAX and 143 Bunds. This trade if weighted correctly will profit when the two lines get closer together and lose when they get further away. However as they're are very wide already it is a good risk:reward trade.

Next looking at the Daily charts for the DAX it is clear that it has overextended to the upside as shown by Moving averages and Stochastics.

All in all, daily charts call for approximately 5-7% pullback which is very simple considering in August 2011 it fell 25% in 8 days.

Daily FDAX. Thomson Reuters.

The DAX is up over 28% YTD compared with much more modest gains from the US, UK and other Major nations - S&P is up 13% and Dow Jones is up only 9%. This is clearly overvalued when you consider the situation in Europe and the risk that faces Germany.

When considering all the upcoming problems Europe has to face it is incredible that the Volatilty index is extremely low, the equivalent of the VIX for DAX is charted here and it doesn't normally stay this low for long. Furthermore nearly every move upwards is associated with DAX downside.

DAX 1 month Volatility. Thomson Reuters

Last chart for German Fundamentals is comparing PMI's, IFO and GDP. While the next GDP report doesn't get released for a while it is seemingly going to be quite a bad release if the other two are to believed. With the GDP likely to fall 0.5% to 1.5% This is the last point and I think while it won't be a reason short term it shows the weakness Germany is facing and it is suseptible to all the problems in the PIIGS.

GDP White (LHS) IFO darker green (LHS), PMI Light green. Thomson Reuters.

Due to this I'm Short DAX at 7610 looking for a move to around 7300 which is where a gap is located roughly along with the 50% retracement of the past few weeks move.

Short Bund trade is just a hedge from 144.85 to protect against DAX position.