The German economy has, to some extent, been the beneficiary of much that has gone wrong in Europe as a whole. It’s status as the world’s largest exporter of, primarily price-inelastic durable goods and machinery, remains in tact even if China has overtaken them in sheer volume. It’s unemployment rate has been dropping now for some 20 years. Confidence is high etc. etc. Nevertheless from a charting perspective it looks as if the DAX has the same pattern as everywhere else, that is a large B-wave. Not very elegant and perhaps not very relevant to this point since it has retraced 90+% of the drop, but it is there.

Just a week or two ago the DAX was trading at levels that it had reached back in early December , so for about 7 months it had gone nowhere. Even at today’s level we are where we were in early Feb. , five moths ago. The latest gyrations may be attributed to Greece, going bust, being saved , going bust who knows. We still have Portugal, Spain,  and perhaps even Poland to contend with and nothing has even remotely been solved. With that backdrop counting the latest gyrations as a first wave down , followed by an a-b-c wave 2 up retracing most of the fall which is normal, is not that far-fetched. It will be negated soon as in this scenario the DAX should NOT make a new high (7600).

If you compare the DAX to the TSE (just click on the charts and move them one below the other) you will see that all the moves are synchronized but have a different amplitude. The TSE being commodity driven is by far the worst performer and has not nearly regained as much of it’s loss.

Today the DAX is trading at around 6800, up another 135 points, primarily as a result of the sale of parts of Deutsche Telekom to ATT for about $39 bln. (has had a pretty negative effect on S )  The DAX had the largest relative drop (apart from Japan) and therefore it may be the first to resolve if we go up or down from here. It would be perfectly normal for the DAX to rise another 200+ points in what might be a wave 4. However if it trades materially above 7100 the bear case is out of the window and we may be on the way to another new high. For the moment things are in limbo.

This is the least likely scenario, but it cannot be entirely ignored! This would unfold if there was no triangle at all  and we get QE3/4/5/6 all at  the same time. not very likely and, from a risk reward perspective, not very attractive!

This is the best longer term chart I could find. Clearly the DAX has proven to be as volatile as any considering the rollercoaster ride it has had over the past 10+ years. Just the broad strokes add up to 19000 points, almost triple today’s value. Clearly, if you could figure this out in advance, and if you abstract from possible tax considerations, one would never follow a buy and hold strategy! Interestingly, a buy and sell approach, even with a great many imperfections will, more often than not, outperform.

So where is this going? For the moment the best count that I can put on this is that we have a 3-4-5 top-A-B-C sequence. Assuming the B is complete (it may not quite be), we are presently in wave C of a “flat”. This would suggest that the flat would form within the light blue trapeze, with c probable equal to A in size. This would take the index to about 3000. It could go a little farther to equate to the wave 4 low at about 2500.

A bullish alternative, would be that we are in a 12 year triangle, that is incomplete. All legs or waves within the triangle should be 3-wave structures. This is readily apparent (in green) for waves a, c and d, but less so for b but I would not get overly religious about that. The problem with that count is that it seems to contradict other expectation. BUT time is on our side as, if this is correct, we should first still get wave e (3-wave structure) that should drop to about 5000/4500, well below where we are now.

Not an alternative but rather a reasonable demarcation of the “degree of freedom” that this index has is depicted by the black lines. I use “reasonable " advisedly , knowing that nothing always works; the French learned that with their Maginot line  and the Japanese are learning it now with their tsunami walls. You can always go around it or over it, or it is a Black Swan event that happens only once every 10,000 years but invariable occurs on your watch. Keeping those reservations in mind, the DAX should not trade much above 8200 or below 2800. Conversely these are definite selling or buying opportunities.

To add a little more detail , the chart shows the trapeze type structure of the flat, which normally is characterized by a 3-3-5 structure. There are two possible ways of doing this depending on where you put the “top”. Using the top to the left of where it is shown gives the best symmetric result as this makes C=B=A, so all three legs are equal! In this chart the triangle in the middle of wave B looks just fine, and the two up-legs are reasonable well proportioned, one being a Fibo 61% of the other. In more detail., below this count is a little harder to maintain;

If you look closely you will see that d within the triangle rises slightly above the top of wave b in the triangle. In the original , orthodox EW approach this was not allowed, but Neely and others have come up with the “running triangle” which occurs in situation where the market is overly bullish. so this may be acceptable. Adding it all up the DAX should drop first to 5750, then to 4500 and then to at least 3000. At each juncture the outlook can be adjusted if warranted by circumstances.

As a footnote ,I point out that this count is similar to that of most other markets and the outcome over the next few years will be roughly similar over a dozen or so indices. However, by assuming the high point at the 2007/2008 low, as opposed to using 2000 as the starting point, the degree of the correction that was just finished becomes one higher (it is a B-wave and not wave 2 of C). In my opinion this “fits” much better given the extraordinary persistent nature of this correction. The inherent risk that this brings with it is that the B wave can trade above the previous high, which is not possible for a wave 2. The TSE index is pretty well identical to the DAX, as its high point also was in 2008 and not 2000, see a similar blog about a month ago..