The German DAX has been falling sharply, since its most recent high at 11 671. Two days ago, on August 12th, the index fell as low as 10 892 and the bears seem to be getting more and more excited. However, from a technical point of view, DAX has at least three reasons to start recovering soon. The first one is shown on the chart below.
Reason #1: The larger trend is up! Ever since the end of the 2007-2009 global stock market crash, DAX has been rising steadily. We have all heard the old “the trend is your friend” saying. There seems to be no indication that a major bearish reversal is happening yet, so we would rather stay with the larger trend.
Reason #2: Broken resistance usually turns into support.
As visible, a corrective channel could be drawn from the highs of 12 398. Its upper line used to be impossible to break for a long time, until July 13th, when DAX bulls finally took it out. Now, DAX seems to be testing if the broken upper line of the channel is going to become support. And now comes our favorite reason.
Reason #3: The Elliott Wave Principle.
On the hourly chart of DAX we could see that the rally from 10 651 to 11 804 could easily be counted as a five-wave impulse. According to the theory, every impulse is followed by a three-wave correction in the opposite direction, before the larger trend resumes. As the chart shows, the pull-back, which has been in progress since the top at 11 804, fits perfectly into the description of an A-B-C three-wave correction. In other words, the famous 5-3 wave cycle is appears to be either complete, or near completion. So, as long as the invalidation level at 10 651 holds, the bulls should not give up on DAX.
