DAX forecast: Ukraine optimism lifts index to extreme overbought levels

Last week, the DAX hit 4 new all-time highs in as many days, before consolidating those gains on Friday with an inside bar candle. It was the German index’s sixth straight weekly gain, pushing it to extreme overbought levels. With much of the positivity surrounding a potential resolution to the Russia and Ukraine war, Trump’s softer tariffs tone and ECB rate cuts all priced in, you do wonder how much further the index will be able to rise without first staging a correction of some sort. So, our DAX forecast is neutral at these levels, and we would not be surprised if markets now headed lower for a while, even if, ultimately, the bullish trend then continues.

Ukraine optimism boost sentiment

Risk appetite received a further boost following President Donald Trump’s discussions with Russia’s President Vladmir Putin over a potential peace deal for Ukraine. While no concrete agreements have emerged, markets—particularly in Europe—have responded positively to the prospect of diplomatic progress. 

There is still a long road ahead, but the mere initiation of talks has already been priced into European assets. A resolution to the conflict could ease war-related costs, particularly in the energy sector, while reducing uncertainty and lifting business confidence—an outcome that would be especially favourable for Europe’s largest economies.

But is this all priced in now?

European leaders to hold emergency meeting on Ukraine

European leaders are set to convene next week for an emergency summit on the Ukraine war, amid growing concerns that the US is pressing ahead with peace talks with Russia—potentially side-lining the continent.  The move follows comments from Donald Trump’s special envoy to Ukraine, who stated that while European leaders would be consulted, they would not have a seat at the negotiating table between the US and Russia.  In remarks likely to unsettle both Ukraine and its European allies, special envoy Keith Kellogg suggested that previous negotiations had faltered due to the involvement of too many parties.

Technical DAX forecast: Key level to watch

From a technical point of view, the DAX is starting to look extremely overstretched to the upside, implying a potential pullback may be on the cards soon. 

Source: TradingView.com

On the daily time frame, the RSI is in state of negative divergence at extremely overbought levels of 80. That is, the RSI is yet to make a new higher high since January’s peak, despite the underlying DAX index making several new all-time highs. This negative divergence can sometimes precede corrections as it indicates the bullish momentum is running on empty.

If you thought the daily chart looked overbought, have a look at the weekly, which also has an RSI level of over 80.

What about the monthly? Same picture: nearly at 80.

Such overbought technical conditions need to be worked off, either through time (i.e., consolidation) or through price action (i.e., a sell-off). In both cases, the upside potential should be limited until the RSI is no longer at these extreme levels.

With that in mind, keep an eye on the potential support zones shown on the chart, if we start to see some downward price action in the week ahead. The most important short-term support zone is around 21800 to 21950, marking the previous resistance area that gave way earlier this month.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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