However, like the rest of European indices, the DAX has been stuck in a consolidation range during these summer months. In contrast, the major US indices have been simply creeping higher, which saw the S&P 500 hit a new all-time high on Tuesday while the Nasdaq went deeper into unchartered territories.
One of the reasons why European stocks have underperformed the US is because of the appreciating exchange rates with the EUR/USD rallying to 1.1950 from a low of 1.0635 in March and GBP/USD climbing to its highest level since early January. The stronger euro and pound reduce the value of foreign earnings when repatriated back to these currencies. Meanwhile, the weaker dollar makes US exports cheaper to foreign buyers, and simultaneously boosts the value of earnings made in foreign currencies when converted back to USD.
But given concerns over Brexit and a second wave of coronavirus returning to parts of Europe, the EUR/USD and GBP/USD may soon reverse from these lofty levels. If that happens, and assuming everything else stays unchanged, then European stocks may soon start outperforming their US counterparts (either by falling less sharply or rising more rapidly).
From a technical point of view, the German DAX index looks the strongest among European peers:
Source: TradingView.com and ThinkMarkets
The DAX has been creeping higher for the past two weeks and is currently in the black for this week too. It is trying to establish a base around its rising 21-day exponential moving average. The recent consolidation has meanwhile allowed its momentum indicators such as the RSI to unwind from ‘overbought’ levels, mainly through time rather than price action (i.e. a sharp sell-off), which is a potentially bullish technical sign.
From a bullish point of view, the DAX now needs to break back above resistance circa 12945/50 and take out the bearish trend of a consolidation pattern in which it is currently residing in. If that happens, then we could see renewed technical buying pressure which could drive the index initially towards its recent high at 13315 and then its pre-pandemic and all-time high around 13828.
The bears meanwhile would like to see the breakdown of further support levels, especially the 12800 level, which is also where the 21-day exponential comes in. A clean break below here could see an initial drop to test liquidity below the recent low at 12515, where the rising trend line of the consolidation pattern also comes into play. Thereafter, the next area of support and the 200-day average meet around 12140-12210.
Overall, the trend is still bullish for the DAX and global stocks in general. European indices have been lagging, but with the US continuing to push higher there is a good chance Europe might play catch up soon.