Retail traders not buying the DAX’s breakout to record highs…yet

There’s a technical trader I know who often takes to social media with the tongue-in-cheek reminder that “record highs are NOT features of downtrends.” The implication, of course, is that traders should focus on buying markets in uptrends, and one of the best ways to identify candidates in uptrends is to look at the markets making record highs.

Perhaps some of our DAX traders could do with that reminder!

Germany’s benchmark DAX (Germany 40) index closed at a record high for the fourth consecutive day, confirming its uptrend off the March 2020 lows. Despite this very clear evidence that German stocks are in an uptrend, StoneX Retail traders are upping their bets against the index. After hovering in the 20-25% long range through last week, just 19% of StoneX Retail traders with an open position on the DAX are long the index; in other words, over 80% of the outstanding volume is on the short side, despite the ongoing rally into record higher territory.

This divergence between price action and trader positioning will be critical to monitor in the coming days. Will retail traders be forced to close their bearish positions if prices continue to rise…in turn contributing to a short squeeze that drives prices yet higher?

…Or are our traders right to be skeptical? After all, the index’s total gain over the last four days is just about 0.7%, hardly the type of violent “melt up” that would spook bears or spark FOMO. In fact, the lackluster performance since breaking out to record highs at the start of the month could be a sign that there’s little buying demand at these lofty levels and that we may be seeing a “false breakout” in the DAX:

Source: TradingView, StoneX

With little in the way of top-tier economic data out of Germany (and the Eurozone as a whole) this week, the focus will remain on price action and positioning. A break back below the key 16,000 level, especially if foreshadowed by a breakdown in the 14-day RSI indicator as well, would point toward vindication for bearish retail traders and a likely retracement back to the mid-15,000s.

On the other hand, the longer the DAX holds near record territory, the greater the risk that shorts will be forced to throw in the proverbial towel. After all, as we noted at the start of this article, the DAX is clearly NOT in a downtrend, and the passage of time tends to favor those positioned in the direction of the dominant trend!

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