Exhaustion levels can be a good indicator when trying to determine a reversal. When a trend has moved too far or too quickly in one direction, it usually results in exhaustion. Today we are looking at the Germany 30 (DAX) Index, which is showing very high exhaustion readings on the Daily time frame. (readings provided through various data providers)
The theory is, once an exhaustion level is triggered it’s time to (in this case) sell since we are in an uptrend or take profit on longs (depending on your trading strategy). However, there are other considerations to take.
Once an exhaustion level or zone has been established, backtesting other times similar exhaustion level readings were as they are at present whilst trading above the 200 daily moving average, can help us understand how this particular market might react going forward.
The above chart shows, apart from 20/03/2015 exhaustion levels resulted in a spike higher followed by shallow pullbacks (shallow pullbacks if you're a mid to long term holder) each time respecting the 200dma.
In the past, this indicator has worked well, but keep in mind these readings were taken during a strong bull market.