Intermarket Analysis Throught Macro and Technical Methods
#35 Setup: Setting up a strategy and macro narratives.
This is a complete technical setup to trade the DAX on the short side. It includes liquidity, long-, mid-, and short-term trends, momentum, mean reversion, and alternative vehicles to execute this macro view, derived from the analysis in the previous article.
The main chart illustrates a very clear macroeconomic situation, perfectly aligned with our macro and intermarket view.
Liquidity is a necessary condition to sustain such an extended rally.
Macro Narratives and Trends
This is an asset that has been lateralizing since 2014. It’s now overextended, lacking liquidity, and at the upper end of the lateral range. The big picture always provides perspective.
Mid-Term Trends.
We understand that this index is between Stage 2 and Stage 3 of the narrative evolution process.
Current Short-Term Trend.
Deeper.
We’ve already seen the information a wedge generates multiple times. A second insight it provides is primary and secondary targets. Keep in mind that the price has yet to give a trigger signal.
Macro Narratives and Momentum.
Internally, we refer to this as the “duplication of divergences.” We’ll soon see why: the stochastic oscillator shows you the RPMs (you need to clutch) of the car, while the MACD indicates the torque and the miles ahead. It’s a solid metaphor for understanding the differences between the two.
That said, the signal becomes stronger when they appear together.
Macro Narrative in the Short-Term Trend
It illustrates the previous point: the car is running at too many RPMs. It needs to clutch and shift gears to continue.
Macro Narratives, Volume, and the Value Zone.
The value zone is a pivot point, acting as resistance or support depending on the direction. We’ve already crossed that point.
Trading Styles and Signals.
In trading Style A, as discussed throughout the blog, the signal has already been generated. However, note that the P/L is not sufficient—at least for us. This comes down to each trader’s preferences and style.
We’ve emphasized many times that P/L is key. Even the best traders succeed in only 50% to 55% of their trades with a 3:1 P/L ratio. Anything less is unprofitable unless your accuracy improves significantly. Variable costs for each trade are an obstacle few address.
Macro Narratives and the Vehicle: Why the DAX and Not the S&P 500.
Because it shows more weakness—plain and simple.
- The dollar is strong and rising.
- While price action shows it is entering Phase 2, it is not as advanced as in other indices.
- U.S. markets are less sensitive to local liquidity, as international flows constantly sustain them.
- Geopolitical reasons also play a role.
- Long-term price structure shows a lateralizing index, which is not the case with the S&P 500.
Macro Narratives and the Vehicle.
There are multiple ways to trade this setup: futures, options, and ETFs.
Here’s a list of some instruments available in the U.S. and Europe:
US:
- ProShares UltraShort MSCI EAFE (EFU)
- ProShares Short MSCI EAFE (EFZ)
Europe:
- Amundi Short DAX 30 Daily
- Xtrackers ShortDAX Daily
Of course, they vary in liquidity and leverage. There are plenty of other options—these are just the ones we’re looking at.
For the thousandth time, these are not trading recommendations.
This is simply what we do, shared for marketing purposes. Do your homework. We’re all adults, and this is not kindergarten.
I hope you enjoyed this article. As always, it was a pleasure to write about it.
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Martin