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Should you buy or sell the Dax index amid tighter financial conditions in Europe?

on Oct 26, 2022
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  • German stocks had a hard time bouncing from their lows in 2022
  • The Dax index formed a bullish divergence with the RSI and might squeeze higher
  • A falling wedge pattern suggests that more upside might be in the cards for German stocks

The world faced a tough time during the COVID-19 pandemic. As a result, governments and central banks had to come up with various financial packages to help economies.

But when compared to other advanced economies, European economies had a tougher time. Russia’s invasion of Ukraine in February this year brought a mountain of new challenges to tackle.

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European nations rallied behind Ukraine, providing much-needed financial support. But the war is far from over, and the European economies are the first ones to show their weakness.

This was the context for stock market investors to consider in 2022. Why would any international investor put money in Europe when in other parts of the world (e.g., the United States, Japan, Australia, Canada) there is no conflict to affect the local economies?

As such, the German Dax index and other European indices declined. However, despite the war, the rising inflation, and the tighter financial conditions set by the European Central Bank, the Dax index is well off its lows.

Is it time to buy German stocks?

The Dax index bounces from 12,000 points and forms a falling wedge pattern

A falling wedge pattern suggests a bullish reversal might take place. While the Dax index did not surpass the level marked by the previous lower high, it is well off its lows after bouncing from the 12,000 points support area.

Dax index chart by TradingView

As it is often the case, the price action after a falling wedge pattern retraces the entire pattern completely. Effectively, it means that we could see new highs for the Dax index, given its resilience.

That would be particularly interesting to watch should the Dax index advance beyond the pivotal 14,000 level. In doing so, it will trip some more stops, considering that most investors are short from a fundamental perspective.

Finally, another reason to buy German stocks is a bullish divergence with the Relative Strength Index or RSI. While the Dax index had recently made a new lower low, the RSI diverged, showing signs of strength.

All in all, despite the bearish fundamental aspects presented in this article, the technical point to a possible squeeze higher. If that is the case, expect the market to move fast as stops would be triggered.