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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 04 February 2013 at 11:35 GMT

Overbought market but Bayer AG still bullish

Trader / TheSteadyTrader.com
United States

Bears and others looking to short the market if just for one trade have plastered the blogosphere recently, spewing about all their cases for the overbought tape to come to an end.  While I generally agree that the overbought conditions should soon lead to a correction of a few percentage points in the major developed market equity indices, it is also worth bearing in mind that such conditions can remain in place for longer than any rational trader may wish to imagine.  Thus far, while overbought conditions are widespread, no real reversal signals have yet marked the daily charts, although individual pockets such as transports and some negative divergence in upside momentum versus price, are initial signs that a pause may not be far away.   

Through a bigger picture lens, the majority of sub-sectors of the Stoxx Europe 600 index remain acting positive, ramping higher off the summer 2012 lows.  The two notable and obvious laggards since September 2012 (telecom and the energy complex) remain struggling.

 Stoxx 600 Sectors

The German Dax stock index too continues its merry path higher and just a little over one week ago pushed to a new high for 2013 and spent the last few trading sessions consolidating that move.  As such from a price perspective in the German Dax any real sell-signal remains absent. 

German Dax 30

All of this makes it difficult to open meaningful short positions until clearer reversal signals appear, although meaningful profit taking of long positions at these overbought levels is hardly a bad idea.  Simultaneously, the trend follower in me dictates that the portfolio should retain at least some long exposure.

In other words, as I am in the business of searching for high probability trades on a daily basis it is admittedly becoming increasingly difficult to find new trades to the long side in the near term.

Nevertheless, as long as the music plays, long-side swing trades have a good probability of continueing to work, and one German Dax component stock that looks good for further ups is Bayer AG (BAYX.N:GER).

From a longer-term perspective the stock looks good for higher levels, although the steep slope of its ascent over the past twelve months may over time need some consolidation.  On 25 January the stock reached an all time high near the EUR 76 mark and has since retraced the breakout and settled back into a previous trading range. 

Bayer AG 5 Year Chart

On the closer-up chart of Bayer AG note that on Friday 1 February the stock retested the lower end of the marked trading range and bounced, leaving a bullish hammer candle behind on the day.  The lower end of the channel also coincided with a rising 50-day simple moving average and momentum as measured by Stochastics was close to oversold, thus further confirming the zone near EUR 71.50 as near-term support.  The stock now has a good chance to work higher and retest the 25 January highs barring any major broader market weakness in coming days.  The stock currently also offers the very defined risk of a fairly tight stop; should Bayer AG drop below Friday's low and hence pierce through the said confluence zone of support, one would have been proven wrong and the long position should be closed.

 Bayer AG Close-Up Chart

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