I assume that the DAX has turned down to start a long decline in line with S&P and FTSE. But there is an alternate wave count shown above. May be the decline is wave (c) of a small correction in the uptrend. This is possible because the previous rally is in five waves [(i),(ii),(iii),(iv),(v)]. In this scenario wave (c) will end near 13200, the DAX will then start a new rally in five waves.
We start the year with excitement, my new global markets strategy has already produced some fantastic results: +430 pips since end of November.
We took 58 pts on our long on gold.
Gold pulled back and we are now long again. It is possible gold is forming a triangle in the fourth wave of an advance as seen on the chart:
he next move would be wave (b) up near 1595.
We are long EUR/USD and short USD/JPY
We are looking to sell German DAX
Results since the end of November 2019
German DAX: +6 pts
Gold: +58 pts
EUR/USD: +195 pips
GBP/USD: +147 pips
USD/JPY: +24 pips
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I believe the rally is not complete because this rally should be in five waves [i,ii,iii,iv,v] and yesterday’s rally above the previous high is in three instead of five. This suggests this rally was the second leg inside wave iv taking the shape of a running flat. Today’s decline is the third leg inside wave iv. The DAX should rally from lower levels.
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When I look at the DAX the pattern is a clear impulse wave [(i),(ii),(iii),(iv),(v)]. I think the DAX will rally to 13500 from current level or lower. I say lower because I am not sure wave (iv) is over because it is a bit small. It could go lower near the 38.2% retracement but it is not required. If upward momentume continues wave (iv) is complete and the DAX will rally to complete wave (v). wave (iv) bottom is at 13044.
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We remain long on EUR/USD, I decided to go long because I believe EUR/USD will get a boost from the falling dollar. You know the Fed is increasing the money supply, this is negative for the dollar. Plus the technical pattern is bearish. The positive for the dollar is that the US economy is stronger than the EU economy but this is about to change.
When I look at the EUR/USD chart we have a two-year decline in five waves that ended on October 1st.
This pattern is an ending diagonal. After five waves down the euro should rally in five waves [1,2,3,4,5], I think a long term rally is underway. The first bounce wave wave 1, the latest pullback was wave 2 seen on the 120-min chart:
We have a perfect Elliott wave inside wave 2, wave 2 is in three waves [a,b,c (circle)] and wave c (circle) is in five waves and there is an extension in wave (v). EUR/USD is now rallying in five waves as the trend is up.
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So far today we have a weak FTSE 100 confirmed by the firmer GBP/USD and the weaker S&P 500. If I look at the Dax 30 it looks like the Dax will decline too in three waves similar to the previous decline. This pattern could be an expanding triangle. However the pattern is not very clear, it can be interpreted differently.
By Ashraf Laidi
As global equity indices decline 3-4% from their highs, questions emerge on the length and duration of the next pullback. Both the FTSE-100 and the Dax-30 staged a 13% rally into late January from their lows of late November. The Dow-30 rose by the same amount but started its rally two weeks earlier than its German and UK counterparts. It also sustained a 3% decline in the second half of December.
European equities are facing their first event-driven decline since the November declines, which were in sympathy of the US sell-off following president Obama’s victory and the ensuing implications for capital and income taxes. Once UK and continental European bourses rallied on the hammering of a Greek debt swap deal, US equities were left behind to worry about the cliff-on-cliff-off fears ahead of the December 31 deadline on avoiding the fiscal cliff. Meanwhile, European and Asian indices went on to chart +30% gains for the year.
Three months later, as we approach the four-year anniversary the multi-year bottom in global equities, the risk climate is no longer free. Two major event risks loom large into the horizon: the threat of Italy’s elections disrupting the nation’s path to economic reforms; and the possible “sequestration” of $85bn in US government spending cuts if no deal is reached by March 1st.
The consequences for each are grave. In the event that Monti’s centre left-Democrat coalition fails to win and Berlusconi’s rightist coalition takes on power and blocks reforms, Italian bond yields will regain the 5.00% level, reigniting speculation of Italy demanding the Outright Market Transactions from the ECB. Yields on 10-year Italian bonds have already hit a three-month high at 4.9%. The consequences are enormous for yields of the €1.98 trillion bond market to revisit their 6% levels.
In the case of the US, markets are already pricing another last minute solution between Democrats and Republican to avoid $85bn of automatic cuts. The Federal Reserve is keeping an eye, and as Chairman Bernanke indicated today, QE3 shall remain as long as unemployment is not reduced. The combination of continued Fed easing, renewed asset purchases from the Bank of England and the Japanese government’s appointment of the pro-reflation Kuroda, global equities are unlikely to sustain declines of more than 5% from current levels.
The Dow Jones Industrials Index is currently supported by the November trendline, coinciding with the previous resistance (now support) around 13,580. We expect renewed buying at those levels for a fresh revisit of 14,000, followed by 14,550s.
The FTSE-100’s is 50-60 pts above its own November trendline support, may give way to prolonged selling towards 6,080s. The index had consistently lagged behind its European and US counterparts through last year until catching up in late Q4. Just when it caught up with its peers, the FTSE shall require a fresh boost from the BoE to combat speculation of a triple dip recession and the threat of more austerity around the March Budget Statement.
DAX-30 nears the triple confluence of November trendline support, the base of the past four weeks and the intermediate high from September at 7,480s. In order for the DAX to lose footing below 7,300s, we have to see an Italy election impasse drag into late Q2 at the expense of further bailouts from Berlin, Frankfurt and Brussels. Markets will also watch Germany’s PMI indices (manufacturing and services) for a continuation of home-driven domestic demand overcoming concerns of a drag from the periphery. A break below 7,250 risks accelerating losses towards the 55-WMA of 7,050.
Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index
By Thierry Laduguie
The 13-day BTI, one of the most reliable timing indicators, has become overbought which is a sell signal. This indicator does not give a sell signal very often, in 2012 it gave 3 sell signals and they were all accurate. The first signal was on 3 January 2012 and the FTSE 100 declined immediately (-1%). Then on 20 June, the FTSE declined immediately and lost 200 points. Finally, on 10 August this time the decline started two days later and the FTSE lost 200 points. Perhaps one of the most spectacular sell signal occurred in July 2011 see:
The 13-day BTI became overbought on 5 July, the FTSE then pushed slightly higher before collapsing. The index lost more than 1,000 points in just a month. As you can see when this indicator is overbought the odds of a large decline increase significantly. I discussed the RSI on the weekly chart two days ago. You will recall the RSI was overbought and is still overbought. Now if you take a look at the daily chart you will see that a new record has been set:
On the daily chart the RSI has hit the highest level in 16 years. The last time the RSI rose above 80 was in 1997 in the midst of the great bull market. This shows you how overbought this market is. The message conveyed by both the 13-day BTI and RSI is bearish. Beside the overbought indicators questions must be asked about the weakness of the Dax relative to the FTSE and S&P. The Dax has been the leading index, in the past when stock markets were rising the Dax would lead by outperforming the FTSE. This relationship has broken down, see:
The relative strength line at the bottom of the chart shows the performance of the Dax relative to the FTSE. In November -December the line was rising (Dax outperformed the FTSE). But since 2 January the Dax is no longer following the other stock markets, it is still trading around the close on 2 January. A fractured market is never a good sign, it seems German investors are not buying this rally and they know why.
There is enough evidence from the above charts to suggest that the FTSE will correct in the near term.
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Thierry Laduguie is technical strategist at e-Yield