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High expectations from Draghi – ECB preview

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The monthly ECB meeting is scheduled for tomorrow and investors seek for ECB stimulus following the Italian referendum.

Tomorrow Draghi will have to react to the Italian vote and judging by the DAX reaction (up almost 5%), investors expect that he will pull out the big guns.

As you will see below the DAX is now testing a critical weekly resistance zone ahead of the ECB meeting. In case of a breakout, it can lead to a huge rally… potential Christmas gift from Draghi.

If the DAX will fail to breakout, it doesn’t necessarily mean that it will experience a sharp decline. Although there might be a short term bearish reaction in case that Draghi will disappoint Investors tomorrow, I think that very quickly the focus will shift back to the Fed (FOMC) and that can put any major bearish move on hold.

EURUSD’s price reaction to the Italian vote supports the second option. EURUSD bounced from 1.05 and reached 1.08, which was the first target zone of the bullish setup that I mentioned in this week’s newsletter (read here). It was a very surprising move fundamentally, but expected move technically.

The EURUSD rally suggests that Investors are betting against Draghi this week – Lack of proper action will boost EURUSD even higher towards 1.1 and maybe even 1.13-1.14.

The German DAX analysis

As mentioned above the DAX is testing a weekly resistance zone:

DAX analysis

GER30 weekly chart

The DAX chart reveals the following data:

  1. On August 2015 the DAX broke below a weekly uptrend line (and stayed below it ever since)
  2. During Nov-Dec 2015 the DAX tried to climb back above the broken trend line and failed – Confirmed the breakdown and change of trend.
  3. Twice the DAX was saved by the 200 weeks MA line (support)
  4. On June 2016 the DAX broke above a minor weekly downtrend line. Later the DAX formed a new minor uptrend line.
  5. This week the DAX completed its climb above all MA lines – Now all MA lines act as support
  6. The DAX reached the 61.8 Fibonacci level.
  7. The DAX completed a weekly bearish Gartley pattern (harmonic trading pattern)

The most important thing that needs to be taken into consideration (in my opinion) is the breakdown of the main uptrend line. That, technically, suggests that the longer term trend is over and that the DAX is either in a consolidation mode or developing a new trend.

If you agree with that assumption than the only question is when (or where) will the DAX turn and start its next bearish wave. The 61.8 Fibonacci level is usually a turning point of a correction wave and therefore it has a significance here. Especially when it comes with the completion of a bearish harmonic pattern.

The other option, in case that the DAX will break above 11,000, is that it will generate a deeper retracement. This is pretty common for wave number 2 (correction wave). In such scenario we may see the DAX reaching 12,000 (88.6 Fibonacci level) or even 12,400 to create a weekly double top.

The 12,000 and the 12,400 price zones will be relevant only in case that the DAX will overcome the current resistance zone and it needs Draghi (or Yellen) to do it.

Summary

Right now the DAX presents a bearish setup with 10,800-11,200 as a weekly resistance zone. Tomorrow you should pay attention to the price action near 11,000. In case of a bearish reaction 10,700 should be set as the first target zone.

The bullish scenarios that were explained above can be relevant if Draghi will indeed pull out a Bazooka. If you are bullish, you can try and trade the breakout or wait for a pullback that will re-test 11,000 as support.

EURUSD analysis

I already covered the different trading scenarios for EURUSD in my weekly letter (read more) so I’ll just point out the recent updates to my analysis here:

EURUSD analysis

EURUSD weekly chart

EURUSD’s post referendum rally brought it to the first bullish target zone (1.08) in one day (300 pips move on Monday). With its rally EURUSD formed a daily Outside Bar (OB) with high near 1.08 and low near 1.05. That means that a close above 1.08 will trigger the OB pattern as a bullish reversal pattern and a close below 1.05 will trigger the OB as continuation pattern (bearish).

If you are bullish you can bet on continuation moves as long as EURUSD stays above 1.05. One zone that you may want to pay attention to is 1.06-1.065 that now turned to a minor daily support zone and can be used as potential Buy Zone.

If you are bearish you should focus on 1.08 tomorrow. It is a daily structure zone and the 50 days MA line is approaching as additional resistance from above.

The first target zone for bearish trades (daily target) should be 1.06-1.065.

Summary

Fundamentally there’s a conflict between EURUSD and GER30. The German Index will probably rally if Draghi will deliver what investors want (more QE… much more) and EURUSD will rally in case that he won’t.

We also see that the technical analysis right now supports the option that Draghi will disappoint tomorrow. The DAX is below a major resistance and EURUSD bounced from a major weekly support zone.

There’s a slight chance that both EURUSD and the DAX will move higher in the near future but the better odds are that they will move in opposite ways.

This blog post lays down the different scenarios that you should be familiar with and will help you make the right trading decision.

 


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