DAX Index Tries to Trade Higher, Yet Coronavirus Threat Remains High

Dax Index
Dax Index

The return of the Dax index remains positive for the day, but traders struggle to lift it decisively higher, as they did with the US markets yesterday. Yesterday, the Dow Index saw a strong lift as worries about the coronavirus dropped-off. However, in the case of Germany, the concerns remain present, as the country is close to Italy and the latest Coronavirus spread.

A Sharp rise in Italian Coronavirus Cases

With Europe’s open borders, it is easy for the Coronavirus to spread. The latest reading from Italy shows that 2036 people have been infected, a growth of 532% in the last six days, or 32.1% per day. If the growth extends at a pace of 31.1% per day, then there will be 14,309 cases in seven days. In Germany, there are currently 165 cases, but it would be fair to assume that it will increase.

As for now, the growth in the number of cases has been contained, and European politicians are downplaying the risks, yet, if the situation gets out of control, they might be forced to shut their borders, and we could see a shock to the economy as we have seen in China.

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PMI for Germany Turns Higher

On the other hand, German Manufacturing PMI for February has been trending upwards in the last few months, and this bodes well if the index can move up above the 50 level. In October, the PMI index reached a low of 41.7, and the latest reading was 48. However, the effect of the shutdown of large parts of China will likely cause German PMI to turn lower in the months ahead.

Despite all the negative news, the DAX index has stabilized inline with US stock market indices. The simple explanation is that at least in the short-term, investors appear to have priced in most of the negative news. However, I don’t think they have priced in the probability of Europe shutting down.

The Technical Outlook for the DAX Index

The DAX index stabilized following a 16% slide from its 2020 high of 13823 and respected the August 16 low of 11403.8. As long as the price trades above the low, I suspect we could see a bounce that sees the DAX index clawback between 38.2% to 50% of its slide from its 2020 high. The interval just mentioned is 12463 to 12724.  Traders that have not already bought the index will probably wait for a correction to the 11403 to 11903 interval to better their risk-reward ratio. If the DAX index failes to trade higher and instead trades below its August 16 low, then it could slide to March 2019 low of 11262, followed by the February 2019 low of 10851.

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