The DOW has clearly exceeded its May 2 high of 12876 by about 50+ points. This would normally negate the count, that is the one where this was wave 1 down followed by an a-b-c correction/rebound. I simple do not know what to do with this! The structure is just fine, only it should not have gone this high. EW is supposed to work when markets work, that is when there are a multitude of participants who freely make up their minds to buy or sell. Perhaps this precondition is no longer met now that CB’s have thrown in 15 trillion into the punch-bowl (1/3 of the value of world equities!), never mind all the other “stimulating” factors. I just do not understand but at the same time will not get religious or dogmatic about it. Other than the Nasdaq, which is in a completely different phase, just about every other major index has NOT negated this count, so for the time being we will stick with it. Below are some examples;
You can click on them to enlarge. Un till such time that a few more of these “negate” the count I will take the catholic approach and simple nullify this one single incident.
DAX, DOW, NYA, SPX, STOX600, TSX
The question is are we in wave 4 of 1, with 5 still to go to complete wave 1 (in black), or did we in fact already complete the entire wave 1 and are now in wave 2 (in blue)? Certainly the black interpretation is the more elegant one, but fortunately it does not matter all that much at this point as wave 3 was the lion’s share of the drop anyway so the proportion of either wave 4 of 1 or wave 2 are not that different. We have already retraced about 40% and are at a wave 4 level, a move to about 62% would not be negligible but certainly not tradeable for most of us. That is why we recommended getting out of longs the other day.
This market is like a casino and roulette is played without the numbers, just black and red and as a result it is a binary proposition, that cannot be controlled too well . This risk-on , risk-off approach does not leave much for error. You should stay short for the next few months as this market has a long way to go. In terms getting short again , or more so, the 62% retracement level is as good a spot as any, but we may not even get there.
DAX, ewg, SI
EW has some aspects that make people wonder in bewilderment how anybody could possible attach any predictive value to it at all. There are tops and “orthodox” tops and failed tops. There are extensions that out of seemingly nowhere add 4 waves to a sequence. There are “irregular” patterns where lower lows or higher highs do not count and the list goes on. For those interested here is an example;
On the left the DAX and on the right the NYSE index. Both have 3 tops at slightly different levels and the middle one is the highest but not necessarily THE top. Getting there certainly does not look like 5 waves and the first wave down on both is anything but a clear 5 waves. The Aug 9 action of 4 days of 400 points up and down obscures the picture, There is no clear wave 4 on DAX whereas there is a pretty clear one on the NYA. Wave 5 on both charts has the clear earmarks of a contracting diagonal, or in English, a wedge. However the position is different. On the DAX the wedge hugs the lower trend line, whereas on the NYA the wedge is further to the right so one could be wave 5 of 3 and the other wave 5 of the entire wave one, different degrees! The DAX made its low almost a month ago and the NYA just a few days ago, yet we are supposed to believe that the world problems are now coming from Europe.
Looking superficially at both charts one might be inclined to say that they are essentially the same, and they are but the implications are quite different for the next move!
DAX, NYA
Mrs Merkel spoke today in Berlin, did not say that much but upped the mood with solidarity etc. etc. The Greek prime minister weighed in with a personal guarantee that the Greeks will do what they have to . For the moment everybody is happy. Here is the DAX;
This could all just be wave 4, or 2 depending on what degree we are looking at, but the action lately has been clear, it is a wedge (diagonal) It should retrace to its base just under 6200. Then perhaps 50 to 62% of wave 3 from the start of July.
DAX
Recognizing the patterns is often as much a matter of art as science. Of course all counts must adhere strictly to the pragmatic rules but beyond that it is sometimes simple a matter of finding that count that is the most “elegant” and therefore , more often than not, the most correct one. Other inputs are also important. It is a Friday and the DAX is down again by 3%, markets lately seem to turn on Fridays or Mondays perhaps because of the political nature of our present macro-economic problem. This gives them 2 extra days to dream up the next band-aid. Moreover the RSI and MACD are decidedly positive. In short my gut tells me that this thing COULD reverse any moment. As pointed out earlier we could also just continue the waterfall. At this time I think we might have gone too far too fast. The pattern that fits most elegantly is the “expanding diagonal triangle”. On the long run there is no doubt that we need to go lower but there might,after all , be a trade here.
The diagonal is only visible in the DAX, not the EWG (or the STOX50, not shown), but there are ways to make it work. Perhaps we are only at the end of wave 3 on the DAX. It is also possible that we are, and perhaps have been, in wave 4 and are simple testing the lows one more time. In any case it has lost over 62% of the rally (at about 5100) so a nice rebound is definitely not out of the question. We would be buyers at 4800 or 16, with a very tight stop. The potential is for 1000 points or 5, the stop should be commensurate. Be aware that the EWG is rather artificial, and does not trade during the same hours that Germany does. It is therefore possible that the target would have been reached Monday morning and yet you do not get filled!
5 on 16 or 1000 on 4800 is 31% and 21% respectively. Significant enough to give it a try. Good luck.
DAX, ewg
The DAX and so many other indexes have been more or less suspended for the past week or two while we await the outcome of the Greek implosion and the American deficit reduction and jobs bill progress. These things always take longer if you are waiting for the outcome. With this in mind an earlier thought with respect to the DAX keeps resurfacing.
The drop of roughly 2600 points from the may high to the Sept low is not over , but we may just get a slightly bigger rebound. The 5th wave of 3 appears to have been a wedge, which normally retraces entirely. This could mean that the present wave 4 could go another leg higher. A 40% retracement of wave 3 would require about 1000 points and this would equate nicely with the start of the wedge , the upper channel line and the 50-day moving average.
After that, as discussed, wave 5 could be precipitous or just wave 5 of 1.
DAX
History has a tendency to repeat itself. Years ago Mr. Leeson managed to single-handedly (not quite), bankrupt his employer Barrons, perhaps the most venerable institution in the UK. Then we had a 7 bln. loss at a French bank and now 2 bln. at UBS. Having myself been in charge of dealing operations at two separate US banks in Canada, I cannot for the life of me understand how these guys can get away with it except is there is gross neglect on the part of these guys’ employer.
When treasury secretary Rubin decided to use the treasury’s funds to bail out Mexico, it was properly viewed as an unlawful use of his powers. Recently the constitutional court in Karlsruhe deemed the actions of the German government to shore up the ECB’s bail-out fund as perfectly legal despite the fact that one does not need to be a legal scholar to know that without any doubt at all it is presently unconstitutional.
So things do repeat or at least rhyme and looking at the exchange in Milan, Italy we are now back at the lows of March 2009. The preferred count would be the standard A-B-C rally that failed to make a new high (an alternative would be a triangle). Here the drop from the Feb. highs seems to be incomplete, needing at least one (if not more) 4 and 5 legs to make it the 5 wave sequence that it should become. This may well become an example for others to follow.
Mr. Geithner who three years ago impressed nobody by his boyish display of inexperience is know back on his white horse galloping to the rescue of Europe’s economy. Just to prove that history does repeat they are again looking primarily at the liquidity problem, not the solvability. All this heart-warming stuff may give that pause that we need. Below is the EWG, another proxy for the DAX. I bring this up constantly and repeatedly as I do not think anyone is actually paying attention.
The EWG is sitting right at the level of the B-leg of the rally (the DAX was a little lower). There is no way that the 5 wave large C down is complete. I would not suggest that the German index needs to follow Milan down the 71% it already has lost (it comes from 45000), but I would nevertheless expect the direction to be the same. As can be seen on the larger scale chart the EWG comes from about 37 and should it get to 8 (where wave 4 of previous degree resides, a very normal event ), the EWG could conceivable go down 78%. That, by the way, would erase all gains over the previous ten years, which , relatively speaking, is not all that dramatic. Athens is, of course ahead of everyone and may actually soon become a buy, if for no other reason than that there is so little room to the downside.
DAX, ewg, MIB
This was our prognosis back in March of this year. Siemens then traded at around $120 fractionally below the high. Then it was suggested that this stock would probable be an excellent proxy for what the DAX might do, after all it is a very prominent company within the German economy. So far this is what has happened;
$81/$82 was suggested as a first stopping level, for the simple reason the that equates with the level of the B-wave, or pause in the rally from the lows of 2008. Notice, by the way , that the entire and larger B-wave is near perfect, with both legs almost vector equal, the second leg just slightly exceeding the ideal level of $142.
From a wave count perspective it is highly unlikely that the initial move down is complete. This is shown below in more detail;
At this point it is not entirely clear if wave 3 (in light blue) is complete or not. We did get to a low of $86.32 (and even lower intra-day outside US hours, so it is plausible. In any event at least a 4 and 5 is required to complete this first wave. The DAX, of course, already has gone beyond this $81 equivalent level and has declined more than the 61.8% of the entire rally, at least on an intraday basis (roughly 5120).
Wave 4 and 5 in the above chart have been drawn on the assumption that the entire drop since $145 in May or June is just wave 1 down! It is however entirely possible that we get an extension and that wave 5 takes us down so far that all of this will prove to be the entire C wave. Waves 1 and 3 have taken the stock from $145 to $85 or about $60. If wave 5, as is so often the case, ends up being equal to 1 and 3 combined and further supposing wave 5 would start around $100 then that would take the stock close to the ideal target of $30. The $10 difference could be accommodated if wave 4 becomes a triangle rather than an irregular flat as shown. The DAX would no doubt follow down approximately the same path. That this is not too far-fetched possibility is pretty evident if one considers that wave A in 2008 took the stock down $120 (from $160 to $40) in 10 months. A similar feat (see the parallelogram) now would take the stock to $145-$120= $25 around Jan. / Febr. of 2012 . If wave 4 starts in a week or so and lasts a little over a month we could be in Nov. by the time wave 5 starts. If 5 then lasts about the same time as wave 3 (2 1/2 months so far) the timing would be dead on! The whole episode would look like this!
Should the slight throw-over of $4 or so in April be repeated on the downside, the stock would trade precisely at $25. A quick look at GE tells us that this is entirely possible.
The moral of all this is that one should avoid the temptation of buying the “dips” because the market is so cheap. If things go as fast as the above scenario suggests you will not have a chance to get out before the bottom arrives and by then you will be a lot poorer. Once I was asked testily by a former “colleague” of mine what this has to do with Canada and the TSE. The answer then and now is that what the DAX does, the TSE does as correlations approach 1 in a bear market.
DAX, SI
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