DAX index recovery finds strong headwinds. Is it a good buy?

The DAX index pulled back on Tuesday as investors continued worrying about corporate earnings, European gas crisis, and the hawkish Federal Reserve and European Central Bank (ECB). The index dropped to a low of €13,200, which was slightly below this week’s high of €13,368.

Germany stocks under pressure 

The DAX index is under intense pressure as investors worry about the ongoing turmoil in Europe. Last week, Mario Draghi, the respected Italian Prime Minister resigned, meaning that the country will soon go to a new election. 

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At the same time, there are concerns about Europe’s energy future after Russia’s Gazprom announced that it will reduce gas supplies via its Nord Stream 1 pipeline. It slashed deliveries to about 20% and there is a likelihood that it will end shipments in the coming months. 

Germany will be in a crisis mode considering that the country depends mostly on Russia’s energy. As such, there is a likelihood that the country will implement gas rationing in the coming months, which will affect companies profitability. Indeed, there are concerns about whether German companies will become competitive without cheap Russian gas. 

The DAX index is also reacting to last week’s decision by the European Central Bank (ECB) to hike interest rates for the first time in more than a decade. The bank also hinted that it will continue hiking interest rates in the coming months. Historically, German stocks tend to underperform in a period when the ECB is hawkish. 

The next key catalyst for the index will be the upcoming Federal Reserve interest rate decision. Analysts expect that the bank will deliver a 0.75% interest rate hike as it continues fighting inflation. 

The top performers in the DAX index on Tuesday were companies Siemens Healthineers, Symrise, Beirsdorf, MTU Aero, and Deutsche Boerse. All these shares rose by more than 1%. On the other hand, the worst performers were Zalando, HelloFresh, Adidas, and Daimler. 

DAX index forecast 

The four-hour chart shows that the DAX index formed a double-bottom pattern at €12,451. In price action analysis, this pattern is usually a bullish sign. The index then found a strong resistance level at €13,368, which was the highest point on June 29th.

The DAX 40 index has moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved below the overbought level. It has also formed a bullish flag pattern. Therefore, the index will likely have a bullish break-out as bulls target the next key level at €14,000.

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