The question at this point is whether or not we are at the beginning of a tremendous sell-off, wave 3 of C within a multi-year correction or if we still have upside potential first. The action over the past few weeks has been ambiguous as is nearly always the case just to confuse us all. Using the DAX as a proxy I can come up with three basic scenarios, the first (in purple) is bullish as we had a simple a-b-c correction and are now on our way to a new high; this would be valid in either a 3-3-5 flat structure or a 5-3-5 zigzag. I have little confidence in this scenario considering the big picture in which we retraced 62% of the entire down move.
The second possibility (in green) is that we traced a 1-2, (1)-(2), a fairly common occurrence where waves of different degrees sort of merge. This would require a 5-3-5-3 pattern which, with a little imagination may actually have occurred. This is a decidedly bearish situation! It fits the bigger picture to a tee.
The third possible scenario (blue) is that we had a first wave down followed by a a-b-c counter-trend correction. This scenario is unlikely to be correct as the b-leg is very obviously a 5-wave affaire which it should not be! Apart from that, this too is a bearish scenario as , once complete, we go straight down again. The critical level to watch is about 6200 on the upside and , of course 5600 on the downside.
For the moment, the evidence in this case as well as in the bigger picture points to the most bearish scenario as the correct one. Instead of the DAX, the Can Dollar can also be used and, for that matter also the S&P, see below.
The S&P, by the way, allows for a fourth interpretation wherein the entire pattern is just one single first wave down followed by a rather pathetic counter trend, again bearish.