The Weekly Chart of the German DAX Looks Toppy

Bearish   

We haven’t written about the German DAX since we showed you how Elliott Wave analysis helped us to predict both the Covid-19 crash and the following rally. Now that this rally has pushed the index to new all-time highs, it is time take a fresh look. Despite the fact that Germany’s GDP just contracted by more than expected in Q3, the country’s stock market index doesn’t seem to care. It trades above the 16 000 mark as of this writing, not far from its July record of 16 529.

What should investors make of all this? Why are German stocks rising, while the biggest economy in the EU is dancing on the edge of a recession? Does the market know something we don’t? Or is it merely refusing to accept reality and only postponing the inevitable? Fortunately, the DAX tends to adhere to the rules of the Elliott Wave principle quite closely. Therefore, its weekly chart can help us answer the above questions.

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German DAX index looking toppy on weekly Elliott Wave chart

As visible, a giant five-wave impulse pattern has been in progress ever since the DAX index was established back in 1988. Waves (I), (II) and (III) are already in place. The end of wave (I) coincided with the top of the Dot-com bubble in 2000. Wave (II) then erased 73% of those gains, before making way for the bulls in wave (III).

Wave (III) is an impulse in its own right, marked I-II-III-IV-V, where two lower degrees of the trend can be seen within wave III. Wave IV was an A-B-C expanding flat correction, whose wave C stands for the Covid-19 panic of March, 2020. Wave V of (III) seems to have ended at 16 290 in November, 2021.

Note that both waves (I) and I of (III) were sharp selloffs. The guideline of alternation implies that waves IV of (III) and (IV) are likely to be some kind of sideways retracements. Wave IV of (III) already is labeled as a flat, and if this reasoning is correct, we can expect a similar shape in wave (IV). The 2023 recovery must therefore be part of a three-wave structure in wave B of (IV). Once it is over, it would be time for another notable drop in wave C of (IV), before the pattern can proceed to its final wave (V).

An alternative count would suggest that wave V of (III) is still in progress as an ending diagonal. Unfortunately for the bulls, that won’t change the negative outlook much. In both cases, we can expect a little more upside towards ~17k, followed by a decline to the support near the 11k mark. By the way, the German DAX is not the only major stock market index, drawing textbook Elliott Wave patterns. Things are getting very interesting in the S&P 500, as well.

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