The German DAX has, and German stock slumped sharply lower on Monday after Russia’s Gazprom further curbed natural gas flows through the Nord Stream 1 pipeline, further accelerating the energy crisis in Europe.
The move underscores a widespread belief in markets that Russia is going to use natural gas as a key tool to achieve its aims in Ukraine, which is a major looming problem for Europe.
Analysts expect that cutting the pipeline from about 25% to 20% of capacity it means Germany will not have enough gas to supply its country this winter without cutting back demand.
Gas market experts say it will mean politicians in Germany will have to invoke emergency programs that currently put the burden on the industry to cut back on energy usage.
This could place further pressure on the German economy, and also German stocks. With this in mind the German DAX is vulnerable to further losses and a potential continuation of this year’s down trend.
Looking at sentiment towards the DAX is almost neutral with just 50 percent of traders expecting more gains. This provides the conditions for a continuation of range bound trading activity, not a major break down.
Neutral sentiment biases are often indicative of range bound trading activity. Therefore we probably need to see big bets placed in one direction before a major price move comes.
GER40 Technical Analysis
The GER40 index has formed a bullish reversal pattern, which strongly hints that we are going to see a continuation of the ongoing bullish directional move is still going to take place.
A break above the 13,400 level could turbo charge the German DAX in future, as the target of the pattern is a huge upside target of approximately 14,000.
The daily time frame shows that the German DAX looks very uncertain after a head and shoulders pattern has been fully activated. This is part of the reason why the Ger40 is bouncing from a technical standpoint.
The final confirmation needed for a medium-term buy signal is sustained move above the psychological 13,800 resistance level. However, I suspect traders have now turned into rally sellers, and this could spell trouble long-term for the leading German index.