The stock market
In today’s world all major economies are globalized and most of the stock indices have a strong positive correlation. Tracking the DAX 30 we see the same bear market picture as in the Dow Jones Industrial Average. There was the Dot-Com bubble in March 2000 and the July 2007 Real estate bubble. When the mood shifts to negative, we might see a decline in the global stock indices. For the past two months the market saw a 10% drop in the DAX 30. The german index measures the performance of the major 30 German companies trading on the Frankfurt Stock Exchange and it is considered to be an indicator of economic health.
Technical analysis
Since year march 2000 we have been tracking a possible running flat “(A)-(B)-(C)”. The first leg “(A)” consists of a smaller running flat “A, B, C”, which captures the last two recessions of Europe, responsible for the low ECB interest rates. Wave “(B)” is a simple zig-zag “A-B-C”, which represents the corrective recovery from February 2009. Its corrective nature indicates for an unstable and false recovery, which means that DAX 30 may reverse sooner than investors expect.
The next chart has its mission to present a possible near-term scenario in DAX 30. The indicator used, is Rate of Change. A divergence is occurring all the way from the beginning of the March 2009 recovery. The slowdown in the Rate of Change symbolizes a weak price momentum. The velocity indicator is helpful in determining trend exhaustion.
Conclusion
Investors should be cautious of the corrective character of the March 2009 recovery. The 10 percent drop should not be considered as a “buy the dip” chance. Extensive time is needed to determine a change in trend. Until we see a large scale impulsive decline, the drop-down remains corrective.
