From an Elliott Wave point of view, the recovery in the Gernam Dax index from its June 5, 2012 low of 5914 does not look like a third wave. In addition, the prior recovery from the September 2011 low of 4965 to 7194 looks like a three wave movement, followed by an overlap. Thus, while we should acknowledge the possibility of the index making one more significant recovery before a more serious decline in the big picture, the near term also warns of an impending completion of a minor diagonal. This is not to say you should run out today and short the DAX. Just be aware that as we witness a slow down in momentum in the ‘e’ wave of the diagonal, we should get ready for a correction. The attached chart of the German Dax shows my Elliott Wave counts in detail.
Back in Dec 2011, I posted my Dax index outlook using Elliott Wave analysis, more with an intention to teach how we could apply the Elliott wave Principle than to forecast. I proposed a bearish count, but the index recovered more than anticpated. Now is a good time to review the movements from the low posted in September 2011.
I am continuing to label the first rally up as wave A for now. Remember that all Elliott Wave labels are work in progress. We will make changes as the market unfolds. The idea is to give ourselves an edge, a system, that will tell us we are wrong much sooner than otherwise. Observe from the chart that we have likely finished a 5 wave rally from the (potential) wave B bottom. If this 5 wave rally is a C wave (and not a 3rd wave) we will eventually get an overlap on the top of wave A to confirm a bearish count. However, I tend to be careful at these levels.
There are two supports that we need to keep an eye on from here. These are 6802 and 6510. Unless we get some really bad news, we should expect 6510 to hold first try and get a move up again. We shall then come back to the question of whether a deep sell off is the correct prognosis for the German Dax.
How bad can it get for the European stocks during this ongoing crisis? In particular, can Germany’s DAX index weather the storm? When one thinks back at how nicely the US stock markets performed during the last couple of years, I am probably going to be frightfully wrong with this analysis. Yet, you should be aware of how bad it can get if things go the way I have shown here.All I have done is to use my knowledge of the Wave Principle, and come up with one scenario. This scenario respects all the rules and guidelines that needs to be followed while using Elliott Wave Principle. However, the picture could change as we go forward, and hence you should be aware that this doomsday scenario is currently mostly academic. (Guess I have given sufficient room to escape your wrath if the index goes straight up!!)
Anyway, I have also illustrated how you could count the waves from the significant low posted by the DAX index in March 2009. At the very least you would have gained some insight at how the waves tie in with each other. Look at the charts in the same order as posted.
Happy New Year folks!