The Dax could have produced a ‘whale trade’

With the Greek panto taking centre stage, the German Dax has been whipping around with abandon. It has still managed to trade within my excellent tramlines, described in my post of 24 June. But my original large-scale Elliott wave count now has some competition, as I mentioned.

Below is the Elliott wave count I suggested back then. Of course, the reason we need to have the large-scale picture is to give us the current major trend as well as likely turning points. For example, if you can locate the start of a wave 3 as wave 2 completes, then you could have a ‘whale trade’ on your hands – and these are well worth catching, because they offer huge gains with very minor pull-backs.

The chart shows what such a trade could have produced – at least 2,000 points in about three months. That would be classed as a whale trade in my book. But back in January, this was a mere glint in the trader’s eye.

Dax spread betting chart

You need to be able to make forecasts based on current knowledge – and then see if the market follows your roadmap as time goes by. If it doesn’t, then maybe it’s back to the drawing board.

The jury is still out as to whether this is the start of a bear phase

When I pulled that chart, the market had rallied up to the upper tramline and was at a moment of truth for my Elliott wave count. If the market had pushed up past it, that would have helped strengthen the case for this count and the prospects for a new high in wave 5 would be bolstered.

If the market was turned back at the resistance provided by that tramline, an alternate Elliott wave count would become a real possibility. After all, it is vitally important to know whether the April high was the top or not. We need to know whether we are still in a bull market or at the start of a bear phase. For a swing trader, this is the crux of the matter.

Here is the alternative large-scale Elliott wave count. The rally off the October low under this count is an A-B-C with the C wave containing a very clear five up (blue bars) with a large negative-momentum divergence at the w5/wC high. In other words, a textbook pattern.

Today, the jury is still out over which count is operative. But the sharp decline off the upper tramline was certainly not a bullish move.

Dax spread betting chart

Here is the daily chart showing the tramlines of the decline off the high. The decline is an A-B-C so far, which is corrective and implies new highs ahead. And the decline was stopped at the Fibonacci 50% retrace of the rally off the December low. But that level is also the Fibonacci 38% retrace of the rally off the October low. This coincidence amplifies the degree of support here – and the sharp bounce to the upper tramline last week was the result.

Dax spread betting chart

So now, we have conflicting clues as to market direction.

Monday’s huge gap down is a rare feature in these days of virtually 24/7 trading. It is worthy of note and the power of the thrust down indicates the upper tramline resistance is strong. Most gaps are filled pretty quickly, so a rally from here is certainly possible.

But if the market can break below the pink line of solid support, that would open up a vision of the market falling to the next level – the Fibonacci 62% – which would probably coincide with meeting the lower tramline.

The market is in limbo

Below is a close-up. Until the 10,800 level can be convincingly broken, we still have a corrective A-B-C decline. But if so, then my bearish target is the lower pink zone.

But if the market rallies from here, a test of the upper tramline becomes likely and if broken, my upper pink zone becomes my bullish target.

Dax spread betting chart

Meanwhile, the market is in limbo and we shall have to wait until a resolution appears. But while the direction of the eurozone is up in the air with Greece having defaulted on an International Monetary Fund (IMF) loan, I expect the market to remain in this state for a while. Trading it will be very tough and profits hard to come by. I shall be standing aside for now.