Is it still safe to short the German DAX index?

The DAX index is having a bad year as investors dump German and other European stocks. The blue-chip German index has fallen by more than 21% from its highest point in 2022. It is trading at €12,765, which is close to its lowest level in March this year. 

More downside for German stocks? 

The DAX 40 index has been in a strong bearish trend in the past few months as investors worry about the new normal in the German economy. 

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The country’s economy is going through significant changes due to the Russian invasion of Ukraine. The country is now receiving a substantially lower amount of natural gas from China. As a result, it has been forced to restart some of its idle coal plants. 

It is still unclear whether many German companies, especially manufacturers, will survive the new normal of higher energy costs. That’s because these industries have been built on the reliance of cheap natural gas from Russia. 

The DAX index has also slumped because of the uneven recovery of the euro area recovery. Most countries in the region, including Germany, are recovering at a slower pace than their global peers like the US. This is one reason why the euro is now approaching parity with the US dollar. While some firms with a presence in the US will benefit from the weaker USD, others like Hello Fresh and Zalando will be hit. 

Further, the DAX 40 index is expected to struggle as the European Central Bank (ECB) prepares for a lift-off. Analysts expect that the bank will hike interest rates by either 0.25% or 0.50% this year as it battles inflation. Historically, the DAX tends to underperform in a period when the ECB is tightening. 

Most companies in the DAX index have struggled this year. The worst performers in the index are Zalando, Hello Fresh, Infineon, Vonovia, and Covestro. All these firns have crashed by over 40% this year. The only gainers are firns like Bayer, Deutsche Telekom, Deutsche Boerse, and Beirsdorf. 

All these explain why I – and Ray Dalio – are selling German and other European indices. 

DAX index forecast 

The daily chart shows that the DAX 40 index has been in a strong sell-off in the past few months. Recently, the index managed to move below the key support level at €13,368, which was the lowest level in May. It has also crashed below the 25-day and 50-day moving averages and is slightly above the important support at €12,450.

Therefore, the DAX index will likely continue falling as the German and European outlook dims. If this happens, the next key support to watch will be at €12,000.