CAC 40 and DAX indices have crashed: buy the dip?

The DAX and CAC 40 Index futures retreated by minus 1.70% on Friday as investors embraced a risk-off sentiment amid the ongoing geopolitical tensions in the Middle East.

The CAC 40 Index dropped to €7,633 on Friday, down from last month’s high of €7,950. Similarly, the German DAX tumbled to €23,400, down from the year-to-date high of €24,475. 

Other European indices also dropped, with the Euro Stoxx 50 falling by 1.73% to €5,268 and the AEX Index falling by 0.42%. Similarly, their Asian and American peers like the Nikkei 225, Nifty 50, and Dow Jones resumed their downtrend.

Why the German DAX and French CAC are falling

European stock indices plunged as fears of a prolonged conflict in the Middle East continued. These fears jumped after Israel attacked Iran’s nuclear sites shortly after an international nuclear agency ruled that Iran was not complying with its obligations. 

This attack risks spiralling into a prolonged conflict that will draw other regional countries. Most importantly, it could lead to supply chain disruptions, which will worsen the state of companies at a time when they are dealing with Donald Trump’s tariffs. 

The other implication is that the attack and the subsequent war may lead to higher crude oil prices this year. Higher oil prices lead to inflation, which, in turn, may affect the ongoing interest rate cuts by the European Central Bank (ECB). 

The ECB has already cut interest rates eight times since last year, and analysts were anticipating more cuts later this year. Higher oil and natural gas prices may affect the trajectory of rate cuts. 

However, there is a chance that the ongoing DAX and CAC 40 crash will be a knee-jerk reaction, a common situation when risks emerge. In most cases, stocks plunge after a major event and then bounce back after a while. 

For example, global stocks plunged after Russia invaded Ukraine in 2022 and then bounced back as the situation cooled down. 

The same happened last year when the war between Israel, Hamas, and Hezbollah escalated. Global stocks also plunged after Israel launched attacks against Iran. 

Most recently, global stocks plunged after Donald Trump announced reciprocal tariffs against other countries. Most of these indices plunged and then bounced back as the tensions eased. 

DAX Index technical analysis

The daily chart shows that the DAX Index jumped to a record high of €24,474 on January 5 and then pulled back to €23,770. The Relative Strength Index (RSI) and the MACD indicators have pointed downwards.

A closer look shows that the index remains above the key support level at €23,425, the highest point in March this year. It also remains above the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bulls remain in control. 

Therefore, the index is likely forming a break-and-retest pattern by moving back to €23,425. Such a move will then trigger a rebound to a new record high this year. 

CAC 40 Index analysis

The daily chart shows that the CAC 40 Index has held steady in the past few days and remained above the 50-day and 100-day EMAs. Also, the MACD and the RSI have formed a bearish divergence pattern. 

The index has formed a bullish pennant pattern, comprising of a vertical line and a triangle-like formation. Therefore, the CAC 40 Index will bounce back as the tensions in the Middle East rise.