The German DAX climbed to an all-time high of 13 597 in late-January. The benchmark had just exceeded the previous record of 12 391 set in April 2015 and the bulls were already bracing for even higher highs in the near future. Alas, it was not meant to be. As of this writing, the German blue chip index is hovering around 11 550, down over 2000 points since January. Is this a buy-the-dip opportunity or the beginning of a bigger decline?
DAX – 17 Months Ago
In order to find out we have to take a look at the big picture through the prism of the Elliott Wave Principle. The last time we did that was May 30th, 2017, and we shared the following chart in an article called “DAX 30: Time to Be Careful Now.”
The chart above allowed us to recognize that the five-wave impulse, which started in March 2009, was already approaching the end of its fifth and final wave. The theory states that a three-wave correction follows every impulse. This meant that “once wave V ends somewhere between 13 000 and 14 000, the bears should return to cause a 30%-35% pullback.”
The DAX made a bearish reversal slightly above the middle of that range. Unfortunately for the bulls, it is down by only 15% from the January top. That said, we suspect the market can erase another 2000 point before it starts to recover. The updated weekly chart below explains.
Here we see that the five-wave pattern we just discussed fits into the position of wave (III) of an even bigger impulse, which has been in progress since March 2003. This makes us think the current weakness is the beginning of a larger pullback in wave (IV). Fourth waves usually reach the termination level of previous fourth waves. Hence, we can expect a decline towards the support of wave IV of (III) between 10 000 and 9000.
The bearish MACD divergence between waves III and V of (III) is another reason not to buy this dip. The German DAX 30 can lose another 2000 points from now on.
On the other hand, the support of wave IV of (III) should be a strong one, since it coincides with the 38.2% Fibonacci level and the lower line of the trend channel drawn through the highs of waves (I) and (III). Low-risk buying opportunities should become available once the DAX drops below the 10 000 mark. For now, the table is tilted in favor of the bears.
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