Looking To Germany For Clues

UPDATE: Jan. 3, 2012

Well it's certainly time for a re-think on that idea.  The DAX appears to have spoken loud and clear when it exploded higher and, with gusto, broke one of the yellow trend-lines that defined the triangle.  But it did not break the one I was anticipating.  This certainly changes the landscape and obviously has far more bullish implications, in spite of the fact that it happened while the American markets were closed and no doubt on miniscule volume.  Nevertheless, the pattern has evolved to the upside.  Here's what it looks like after the $DAX popped by 4.55% in two days:

Click here for a live and updated chart

This action changes the picture in a big way with the $DAX now apparently setting its sights on the first logical resistance level of 6500.  It might also have plans on surging higher to tag the gap that occurred in the first week of August at the 7060 range.  In doing so, it would likely still remain within the yellow channel and take on a five
wave pattern to complete the upward correction.  So... when the market speaks we have to listen, remain nimble and be willing to accept that our first opinion was the worng one.

It's difficult to say whether or not the US markets have to follow.  I recently read an opinion that if the European equities markets surged, it would come at the expense of the American markets.  That isn't usually the case of course but the argument was that some of the largest investors would be in the mode to "buy Europe and sell the US".  That's one argument that I'm having trouble swallowing since it appears that the Euro is trying pretty hard to put in a bounce here while the US dollar appears about ready to break down further.  So if anything, the opposite should be happening... US equities surging while there should be pressure on European equities.  More likely, both equities markets appear ready to head a bit higher.  Why are the equities markets heading higher?  Because the markets are open, that's why.  They certainly have become one convoluted mess... a mine field where human beings don't really belong.

The S&P 500 on the other hand seems to be finishing off a 5-wave structure to complete an 'abc' correction upward.  That process looks nearly complete.  My best guess is that it has one more pop left in it and should complete within a day or two right around 1290.  Perhaps the $DAX has similar intentions.


ORIGINAL POST

There's no doubt about it, the goings on in Europe have taken center stage the past few months so I thought I'd take a closer look at the markets over there.  Well I guess I should say "market", since I believe the $DAX holds the key.  The FTSE is (and always has been) just as manipulated as Wall Street and mirrors it too closely to provide honest clues.  After all, London is the banking center of the world, right?  Ask any Englishman.  Just like Toronto is the center of the universe.  Just ask any Torontonian, he'll tell ya, lol  Ok, ok, that was all in fun.  No offense to our friends out east.  You know we in the west love ya... more or less ;-)

In any event, on a daily chart of the DAX, we're not getting any clues at all from any of the momentum indicators.  All the basic measures of momentum, the RSI, MACD and the stochastics, are all pretty much in neutral territory and 'could' evolve in either direction.  And no matter which way they decide to go, nobody would have any right to claim that he's "surprised".  The moving averages are doing the same thing, grinding themselves into a dribble that's headed due east.  And of course all these symptoms are absolutely typical of a consolidation phase.

Elliott Wave theorists will look at the chart below. apply their magic to it, and come up with their own counts and expectations.  I respect them all, because even though they would likely produce several different counts with several different outcomes, it's not an easy art and it takes a lot of patience and vision that can conjure up all kinds of alternatives.  Quite frankly it's the alternatives that constantly have me questioning my own work because 90% of them, when viewed as a standalone without reference to the other options, seem to make sense and can appear to be quite convincing.  I'm just not very good at that.  I'm just not a good waver.  In fact the last time I did any seriously good waving was when the bus carrying the South Okanagan Bikini Team drove through town.

Click here for a live and updated version

So taking a look at the DAX with a clear slate and just considering basic old school chart patterns, the potential for a seriously big downdraft seems quite possible... and probably more likely to happen than not.  I honestly don't think it's reasonable to expect the triangle in the chart above to break to the upside in spite of the fact that the spigots have been turned wide open at the ECB.  Some have claimed that the recent emergency funding in Europe is the equivalent of quantitative easing in the US.  Perhaps so, but I don't believe we can expect the same result.  IOW, I'm not so sure we should be expecting those funds to be filtered through the European equities markets.  It just seems to me that they have a lot of other areas where those funds are needed a whole lot more desperately.  I'm not sure they have time for filtering. If the resolution turns out to be to the downside, the measured move would have the DAX attaining a minimum target of about 4515.  But in the larger picture, I also don't think it's unreasonable to expect the next leg down to be approximately the same length as the first leg lower down into the triangle.  In that case, the DAX could ultimately end up sniffing for a bottom somewhere in the area of 3050 and with a preliminary target date of approximately March 13th, 2012.  First things first of course.  We need to see which direction price action breaks out of the triangle, but if it's to the downside, I'd expect 4515 as the first stop and darned near assured.

But to be perfectly up front, I have to admit that if I look at the chart without taking the 'old standard' into consideration as I've drawn it, I couldn't argue with an Elliotician's declaration that a whole lot more upside is required in order to complete an 'abc' correction upward off the September low.  So what it all boils down to is "who's right?"  He who argues for more upside or me who argues for a break to the downside?  I don't know yet.  And neither does anybody else except perhaps for those who are privy to Goldman Sacks' playbook.  Yes, they control that market as well.  Alessio Rastani agrees.  So either way, until we see one of those yellow trend lines be broken one way or the other we really won't know.  The triangle is the key.

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