The German stock index – the Dax– is proving to be a popular market to trade with new students of the Trade for Profit Academy. Today, I will show how I am trading it.
Until recently, European stocks were the talk of the town, mainly because they were considered cheap compared with many other global markets. And the kicker was the falling euro, which naturally was seen to benefit German stocks in particular, because of their huge export presence.
That made buying German stocks a no-brainer – until recently.
The problem with that line of thinking is that it assumes that stocks will always be rising. Remember, in a falling market, cheap stocks get even cheaper. So buying on the basis of relative ‘value’ only works in bull markets – and fails miserably in bear trends.
So the big question today is this: is the bull market intact or not?
The Dax is heading down – but probably not for long
Below is the current weekly chart going back to the plunge low of 2009. The overall form is a massive A-B-C, with an even larger B wave. Just a quick look at the chart shows the six-year rally is not a motive wave in 1-2-3-4-5 form. Try as I might, I cannot fit a five up structure to it. It has to be a three up. That implies a large down wave will follow the current pattern.
What’s more, the C wave contains its own classic five up which has also completed at the wave 5 high in April. And this mini-five up has a lovely long and strong wave 3 and a textbook A-B-C form to wave 4.
But the icing on the cake is the form of wave 5. I have a lovely tramline pair where the upper tramline has multiple prior pivot points (PPPs) and takes in the recent highs. The lower tramline sports five accurate touch points, making this line highly reliable as a line of resistance now that the break occurred on 1 June.
But note the five up pattern in the purple wave 5, complete with a huge momentum divergence at the top. That was the final signal to start looking for an exit (if long) and/or sell short.
The odds are very high that the main trend is now down. But what are the prospects today? With the sharp breaks, momentum is very oversold and a relief rally appears likely.
The market has hit the Fibonacci 38% support level, which makes a near-term rally highly likely. That sets up the possibility the market could make a kiss on the lower tramline before peeling down in a scalded cat bounce.
If that occurs, a textbook trade entry will be presented.
A rally could be coming – but how strong might it be?
If we zoom in to the hourly chart, we can see how this forecast shapes up. The move off the 26 May high is in five clear waves – and contained in the trading channel described by my tramline pair. That is very pretty, although the spiky nature of the hourly chart makes precision trading difficult.
However, yesterday’s plunge low below my lower tramline has all the hallmarks of a selling exhaustion, which often comes at the end of a sharp break, such as we have seen here.
My first target is the upper tramline in the pink zone. If the market can overcome that resistance, it will be onward towards that kiss, making a long trade very tempting.