Fear, pessimism and panic continues to surround global equity markets as China have devalued their currency for a second consecutive day. The PBOC (People’s Bank Of China) let the Yuan depreciate further with a value against the U.S. Dollar of 6.59 internationally, dropping a total of 4.8% in two days. This has caused equity markets to continue their large sell-offs due to the future uncertainty of China – see full article here
Weakening the Yuan is a tactic to help boost the Chinese economy which will have the effect of making the Chinese goods more affordable internationally as the export prices drop. When one looks at the data Balance of Trade data released last weekend with a drop of 8.3% in Exports for July (YoY), it certainly looks like a harbinger of doom coming to the global economic table. Chinese data released this morning showing Industrial Production for the month of July (YoY) also dropped, from 6.6% previously to 6%.
The DAX lost 2.7% yesterday and a further 2.5% today as investors liquidate their positions due to the uncertain financial future in this current economic climate, as the demand for luxury brands and cars will subside due to Imports becomming more expensive for China.
The idea of the Fed raising Interest Rates in September becomes ever more unlikely, with a postponement to December at least, with the Dollar strengthening off the back of the Yuan devaluation. This has certainly been reflected in the Gold market which has risen for the fifth consecutive day to a three-week high.
Looking at the Daily chart of the DAX below, one can see price has come into a level of key resistance – the 200 day moving average (green line). This level is a very important barometer of a market, certainly one that is and has been fueled by cheap money from the European Central Bank since late-January through its €1.1 Trillion Quantitative Easing program. Price tested this area for two consecutive days at the beginning of last month but failed to move below. This level will be an important one to watch, as a close on the Daily chart below this level could signify entry into a Bear Market. For long-term Bulls like myself, this represents a good buying opportunity where risk can easily be defined and limited.
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Looking a the Hourly chart of the DAX below, make a note of the Yellow areas on my chart. These were added back in January & February, and the market has not forgotten these important levels of support and resistance. The 11328/11316 zone was breached in trading yesterday only for price to retest this zone during today’s Asian session. However, Bulls failed to get back above 11328 and price rotated to the downside once more. The same pattern emerged at the 11194/11174 zone, a break, a retest and a fall back lower. Price then hit the 11018/10987 zone and met firm resistance as this also coincided with the Daily 200 MA.
(click to enlarge)
CONCLUSION – NEUTRAL
However, I am Bullish from the Daily 200 MA as it represents a good buying opportunity with risk that can easily be defined against this strong level. I have personally bought into this area today when price came into the 11018/10987 zone.
For Bulls, a value entry point is against the 11018/10987 zone & Daily 200 MA. For risk averse traders, the Hourly 200 MA needs to be taken out and reclaimed which is around the 11467/11457 zone.
For Bears, opportunities present themselves at the 100 & 200 MAs on the 5 minute chart, into the 11194/11174 zone, 11261 (Yesterday’s low) with the line in the sand being on a break above the 11328/11316 zone which is where today’s high resides.
Bearish targets :-
- 10982 (Daily low)
- 10892/10856 zone
- 10812 (Daily S3 Pivot)
Bullish targets :-
- 11194/11174 zone + Daily S1 Pivot 11173
- 11261 (Yesterday’s low)
- 11323 (Today’s high)