DAX in Free Fall After Unexpected Drop in IFO Business Sentiment

IFO Business Climate data unexpectedly fell to 87 compared to last month’s reading of 88.6

Analysts’ forecasts were for a slightly higher reading of 88.9 compared to the previous number. Today’s data shows 3 consecutive declines in business sentiment in as many months. The IFO index peaked last April at 89.4 points.

The IFO Business Climate index gauges manager optimism on the state of the economy. The index is compiled through a survey of 9,000 managers. The IFO president, Clemens Fuest said “the German economy is stuck in the crisis”

I’m not sure which crisis he refers to, but a slew of bad earnings, including Tesla, has added fuel to negative sentiment. All major U.S. indices fell yesterday, the NAS100 having its worse one-day drop since 2022.

The DAX dropped 1.09% yesterday and is down 0.9% as negative global market sentiment infects the German stock market. Next week, on July 30, we get GDP Growth Rate flash for Q2. No forecasts yet from analysts but Q1 GDP Growth showed a decline of 0.2% in economic activity.

Technical View

The day chart below for the DAX shows an interesting formation, a head-and-shoulders pattern. This type of formation on a day chart is particularly significant. And usually leads to substantial drops if the market breaks out to the downside.

Today’s candle has found support on the bottom of the Ichimoku cloud. And if that holds we can expect a bounce higher. The next resistance would be the top side of the cloud and then at 18,601 (black line), which coincides with a previous high.

If the market breaks below the cloud, support would be at 17,939 (green line), which is the low of the dip from the all-time high. Should that level break, the next major support would be on the low of a major Hammer candle at 17,419 (orange line).

If the market does break out below the cloud, we can consider the DAX to have taken on a bear trend in full swing. The break below the cloud would also coincide with a break below the neckline (grey line) of the head-and shoulders patter, giving more evidence of a bear market.