A lesson in trading the DAX

The German stock index has been in great favour from advisors wishing to play the EU recovery theme.  And recent data appears to support this belief.

But from a swing trading perspective, the recent rally has provided a gold-standard trade setup.  And this has been a shorting opportunity – and goes directly against most advice handed out by pundits who invest on hope rather than the charts.

I love it when that happens!

Here is the long-range daily chart

The high was made in April last year at around the time of the all-time Dow/S&P high.  The decline off it has been a series of large steps down with also large counter-trend recoveries.

The latest recovery off the Feb low took the market to the Fibonacci 62% retrace if the previous wave down and on a clear A-B-C three up.  That is always a sign of a counter-trend move and confirms the main trend remains down.  That is the first point – and if you believe trading with the main trend is the safest policy, we should look to find short trading opportunities.

Ideally, entering a short trade at that Fib 62% level was the best place.  But if you missed that one, how do we find another high prob/low risk trade entry?

Here is the hourly chart of the most recent rally phase:

This rally is textbook with a clear five up with a mom div at wave 5 (the Fib 62% level on top chart).  The rally has also traded inside the trading channel between my lovely tramlines.  And when the market broke through the lower tramline last Monday, that was the signal to enter.

But that was not the only good entry point – there was an even better one when the market pulled back to place a kiss on the lower tramline (now resistance).  That was a superb low risk entry around 10,340 because you could set your PS (protective stop) just inside the trading channel.

This morning, the market has moved down off that kiss in what should be a scalded cat bounce.

But first, it must navigate the Fib 50% support level which is also the region surrounding the previous wave 4 low (usually a good support area).  If a bounce does materialize near term, there should be another good high prob/low risk entry.

I have targets set much lower.

VIP Traders Club members are short DAX.