#^dax

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Sticking  fork in the German DAX

First, to all my Jewish friends that are fasting today, I apologize.  But I would rather put my fork into more German potato salad than into the German DAX.  Doesn't it look good?  A nice big bowl with some sausages along side?  How can you go wrong?  How is this relevant?

The German DAX Composite ($DAX, $EWG) has a fork in it.  The chart below shows the Andrew's Pitchfork off of the high made back in April.  The market was just getting ready to soar this time last year.  But since that high it retraced 75% of the move up with the low print in August.

Which brings us to this Pitchfork.  the Pitchfork tool is a good trend identification tool.  but it also can be used to identify a trade reversal or when to press the accelerator.  The blue Pitchfork clearly shows the downtrend since April.  After the bounce in July the Composite has settled back at the Lower Median Line of the Pitchfork.  A break of that line is significant, like at the August low and Monday.

A break of the Lower Median Line puts the Composite on Watch to press the accelerator to the downside.  The trigger is the dotted red line.  It is the Hagopian Trigger Line, and what to watch now.  A break of the trigger Line is the signal to press the bet lower.  But like anything in the market it is not a guarantee.  As was shown in August when the Composite broke the Trigger Line but then was quickly bought up.  As I write the DAX is bouncing at mid day in Germany and still well above that trigger Line.  Still a short but not a disaster yet.

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Opa! Greece is saved and the German Market breaks higher....or not

The German DAX started a move higher out of consolidation as 2015 began.  What was running as a 3 Drives pattern failed in the last leg though and it started back lower.  The Greek situation probably helped it continue lower in a channel illustrated in the chart below.  So with the Greek bailout announcement and the move higher of the DAX out of the channel all is well right?  Not so fast.

There are some signs that the worst may be over.  The momentum indicators give some of them.  The RSI is making a new high and rising.  It is nearly into the bullish zone over 60, and at the highest level since the peak at 12390.75.  But it is not yet in the bullish zone.

The MACD has crossed up and is rising too.  A positive sign but the sign on the MACD is not positive, it is still below zero.  Finally, the last 3 candlesticks in the price action took the price above the falling channel.  But the gaps between the moves, and the shrinking candle size, capped off with a Hanging Man candlestick Monday give pause.  These create an Advance block pattern, showing weakening strength or exhaustion.  

A continuation would end the caution.  Especially if it happens on a long body candle, and a move over 12000 again would seal the deal for a reversal.  At that point you can look for an AB = CD pattern with a target to 14700.  But lets not get ahead of ourselves.  Monday was a positive day, but the downtrend killer.

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Germany is Unstoppable

Anyone who knows history knows that the Germans have always been on a path towards world domination.  And it is no different in their stock market today.  Chancellor Merkel is outraged that the US market remains the leader in attracting capital as you can see, and if doing all she can to push the German market higher.  Take a look.

The chart above shows the German DAX on a monthly basis since 1995.  It had the same consolidating pattern from 2000 to 2013 that the US markets had.  In an ascending triangle.  But since then it has kept going higher despite reaching targets for patterns, pausing and then moving up again.  No reversal what so ever.

First it was the break of resistance of that ascending triangle.  Then the completion of the blue Deep Crab harmonic around 9000.  Then the Measured Move to 11000 and the red Deep Crab harmonic at 11100.  This latest round of consolidation and no pullback leaves but one target area:  13500 to 13700 and world domination.

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Three Drives for the German market

Germany is known for their engineering and precision, especially around their cars.  BMW, Mercedes and Porsche all bring to mind these qualities as well as speed.  All are great cars to drive.  Three top quality drives.  And speaking of three drives, that phrase can be used to describe the German stock market too.

The chart above shows the German DAX Composite ($EWG, $HEWG) over the last year.  You can easily see that since the ECB started talking about their own version of Quantitative Easing last fall the market has rocketed higher.  

But if you focus on the start of the move through the resistance at 10100 around the beginning of the year, a distinct pattern emerges.  The first blue arrow higher covered about 1600 points in the DAX before some consolidation.  Then the second leg that began in mid February covered about the same 1600 points before the recent consolidation.  With a move over 12200 the next leg, the final one of a Three Drives harmonic pattern, gets under way and targets about 13200 above.  

So only 2 questions remain.  Which car is associated with which leg higher?  And will there be a need to add an Audi to the mix for a fourth leg in the future?

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First is the Worst, Second is the Best.... Dax vs S&P 500

My kids tell me this all the time. "First is the worst, second is the best....." Maybe I have a practical application for this now.

Exactly one month ago sentiment seemed high for a reversal in the S&P 500 lower. The index had just hit new highs at 2119 and was hovering. Shorting as a stock or index makes a new high is not my thing so at that time I cautioned traders against doing. In the short term I was wrong. The S&P 500 pulled back 3.75% if you caught both ends. Not a bad trade. But who catches both ends?

I actually went a step further than just a caution. I suggested there is a better way to do it. Go ahead and short the S&P 500, but buy the German DAX, here. At the time the ratio of the DAX to the S&P 500 was at 5.308 and it targeted a move to 5.89. Guess what happened? It did keep moving higher but stopped short of the target, at 5.879. That was a 10.75% move. Almost 3 times as big. If you did not listen then I hope I have your attention now. A second chance may be setting up.

The original chart from a month ago has been updated above. After a short pullback the candle Tuesday, a bullish engulfing, suggests a new move higher might be under way. A third leg would complete a 3 Drives pattern and target a move to a ratio of 6.39. This would be an 11% move from the closing ratio Tuesday. Second is the best. Of course third is the one with the hairy chest. Not sure how that fits in but one step at a time.

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Want to Short the US Market, Then Do it Against Germany

The US stock markets are looking very bullish.  In fact there have generally been bullish for 6 years.  Yet there always seems to be someone who thinks that the top is in and markets are about to crash.  If that has been you over all this time then I feel sorry for you.  The signs have all pointed higher except for a few brief tenuous moments. 

 I have learned a lot of things over the years, and one of them is that people have a hard time with change.  So if you are one of there perma top callers I have an idea for you.  A way for you to express your opinion with real money, without losing your shirt.

The chart above shows the German DAX against the S&P 500 in a ratio.  And it holds the key to you betting against the US markets.  The ratio has built a Deep Crab harmonic since late September.  That completed in January and started to reverse.  But look at the reversal.  Not even to the 38.2% retracement before turning back up.  This is a strong pair.  And with it moving higher there is now a target on a Measured Move to 5.89.  That is 11% higher than where it currently stands.

By buying the German DAX (or its proxy $HEWG) and selling the S&P 500 ($SPY) you can express your view while still making money as the ratio rises.  Just watch for a move below a ratio of 5.15 as a stop out level, and dream on bears.

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An Update on the German DAX

Friday morning last week in The German DAX Cannot Fall Further  I wrote about the Head and Shoulders top in the DAX ($EWG) and how the target lower would measure to at least 7750. It broke the neckline lower before the ink was dry on the paper and headed south.  And you can see Angela Merkel's reaction.  So rolling 4 trading days forward we see that the DAX is actually moving up? Huh?

This is actually quite normal and does not negate the pattern. In fact it would take a move over the right shoulder at 9891.20 to negate it. The retrenchment after a breakdown lower is a natural profit taking or short covering. Technicians trading the short side of this would love to see the DAX retouch the neckline and then reverse lower, strengthening the breakdown. It would re-enforce where to put the stop loss, and much lower than the 9891 level.  Wednesday seems to be renewing the downward move.   The close is more important than the mid day price though.  Keep an eye on this bounce and be ready.

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The German DAX Cannot Fall Further

This is what Angela Merkel is saying in the picture above. Unfortunately the German DAX ($EWG) has a lot of short term badness piling up against it. The chart below shows the daily price action since the major low in September 2011. The run up to 10050 and subsequent consolidation above 9000 now seems at risk as it sits at a critical level. This is happening just above the 23.6% retracement of that move higher at 8850 and the tails of the prior lows have nearly touch that level. As I write it is cracking the barrier. The third time here, it is now making a bearish Head and Shoulders Top. If it breaks down below the neckline it would target a move to at least 7750. The RSI, a momentum indicator, is also right at an important level at 40. A move below that turns it bearish. 7750 is not that far from the break out range that drove it higher. Perhaps a retest? Not if Angela can help it.

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