The German index has struggled a little bit on Thursday, as traders continue to pay close attention to headlines, and the German 10-year yield.
DAX
The German index has struggled a little bit during the trading session on Thursday as the 25,000-euro level continues to be an area of significant resistance. It's worth noting that at the end of February we had a massive gap in this area that was just filled on Wednesday and perhaps a little bit of market memory is creeping in to cause some concerns.
All things being equal though, this is a market that I think eventually breaks out, but there are a lot of things that will come into play to determine where we go next. The first one of course will be in the Middle East and it will be whatever the recent headlines are. Unfortunately, that's not something that Germany has any control of, but it does obviously influence the idea of what the energy situation might be in the European Union and therefore how it behaves with the German industrial base. That's a huge part of DAX.
Market Volatility and Interest Rates
The pullback from the 25,000-euro level is just a simple play on a large psychologically significant figure and it should not be thought of as a huge surprise. Quite frankly, I think this is an environment that we find ourselves in that is just simply very difficult to trade and while interest rates in Germany are below the 3% threshold on the 10-year again, they are just barely so.
In this environment it is going to be difficult to look at this as anything other than a volatile situation that just screams trouble if you are not careful. With this being the case, I like the idea of perhaps buying this dip, but I also recognize that you need the bond markets to behave in coordinate its attitude as well.
If the German 10-year yield can continue to drift below 3%, I do think eventually the DAX takes off to the upside. I also recognize though that there are a lot of concerns out there and at any given moment we could get a tweet or a press conference or other such nonsense throwing the market around. It is because of this that position sizing will be crucial and it is essentially your only real defense against volatility.
If we were to fall significantly, the 24,000 level is very intriguing to me as a potential value play as the 50-day EMA and the 200-day EMA indicator both sit there.