Europe’s going haywire – let’s get stuck in

I sat down this morning to write about the impending agreement between Greece and its creditors. Well, so much for that. The Greek panto continues, and the markets look set to remain volatile for at least a little while longer.

As swing traders, we’re primarily interested in one thing: finding great trade setups.

If we do eventually see a further extension of the ongoing ‘extend and pretend’ debt operations – operations that depend upon a certain confidence in the future – we can be reasonably sure that sentiment remains bullish.

If the public mood were bearish, it is very doubtful Greece would be rescued again.

And that is why stockmarkets – the most immediate barometer of public mood – reacted positively earlier this week. The index with the greatest exposure to eurozone affairs is the German Dax, and I have been following that index closely.

A perfect tramline pair let me set my stall out early

The Dax rally has carried to a critical point on the charts. Here is the hourly chart I showed in my post of 15 June:

Dax spread betting chart

I was working with excellent tramlines and the market had dipped to kiss the centre tramline. But would the market immediately rally from there?

In fact, it had one more dip and I was then able to draw in a better tramline trio:

Dax spread betting chart

The market did slightly overshoot my centre tramline, but then girded its loins and rallied past the upper tramline – but not before planting a kiss. The market then roared up in a traditional scalded-cat bounce.

Remember, when you see the market kissing a tramline, look out for a rapid rejection of that line – that’s what I call a scalded-cat bounce. When you see that, it is a great trading signal.

So, where does this action fit into the bigger picture this morning?

I have a superb tramline trio on the daily chart – the first tramline I drew was the obvious centre line, which has all of the lovely major lows in the period. I then drew the upper tramline, which takes in sufficient major highs (highlighted) to validate that as a reliable line of resistance.

Dax spread betting chart

Finally, and because the centre tramline had been broken, I drew in T3 equidistant. And lo and behold, the recent decline stopped right on my T3 target.

Remember, I could draw T3 immediately when the centre tramline had been broken. That gave me several days to prepare for taking profits at my pre-determined target. And that is one of the major benefits of using this particular trading method.

What’s next for the Dax?

Today, the market is in rally mode back to the centre tramline, but momentum is over-stretched. Will it make it?

Let’s now zoom in and take a closer look:

Dax spread betting chart

Now, I have a lovely down-sloping tramline pair with many excellent touch points. This morning, the market has carried right to the upper tramline and is currently testing resistance on that over-stretched momentum.

There remains a gap up to the centre tramline where the kiss, if it occurs, would be placed. But note the form of the decline – it is clearly in an A-B-C form, and that is always counter-trend, which implies the resistance will likely be overcome and the kiss planted.

Finally, how do these patterns fit into the larger Elliott waves?

This is the daily chart from the October 2014 low, and it shows a typical wave pattern of a bull market. My wave 3 is long and strong and all of the waves look in proportion (a necessary condition for a valid count).

Dax spread betting chart

Wave 4 has that typical A-B-C form of a fourth wave. The conclusion? Expect the market to move higher into wave 5 and into new high ground above the wave 3 high.

As ever, there is an alternative scenario that has the April high as the all-time high and the market now in a bear trend.

I will cover that scenario in later emails. But in the meantime, the market is offering some great short-term trades off the hourly chart.