Requires registration
Dax Xetra (DAX)
Moves in the German index have worked out just as I expected when last discussed in late January. Following the initial false upside breakout that failed to break above the 2007 highs, the triangle pattern (drawn in mauve on the chart) pointed downward toward a target of 6,630. In the event, we have seen a low of 6,384 so far. Subsequent activity may have given heart to mauled bulls. However, in common with other major world indices, the limited upside correction is seen as more probably a bear flag. This would suggest the 1,716-point decline that started at the turn of the year has only reached the halfway marker and that if the flag pans out, a similar move down from its breakout point of 6,800 should be anticipated. This would of course take the index close to the 50% retracement of the 2003-2007 bull market rise, which comes in at 5,174.
Even more worrying is that a clear break and close below 6,290 would complete a large head-and-shoulders formation that itself suggests a 1,711 point downmove to 4,710. Bulls desperately need to see the index first climb and close above 6,800 and then successfully negotiate resistance at 7,066 (that will need a close above 7,200). Perhaps something of a faint hope at present.
S&P 500 (GSPC)
The predicted retest of the January 1,270 low has been seen. This level represents the last realistic point for a decent rally as, from a Fibonacci retracement perspective, 1,257 represents the 61.8% level, a bounce from which could yet confirm that the recent downmove is a correction requiring a re-adjustment of the wave count. That is the kindest slant I can put on the chart. More likely is that we are in the first leg of a significant three-wave downtrend. This first leg will likely be made up of five sub-waves and, though we could currently be ending the third of these down waves, possibly via test of congestive support around 1,238, and then expecting to experience a corrective upmove wave four that risks the index climbing as high as 1,423. If the wave count pans out the index seems set to make significantly lower numbers as the final wave five develops. In reality it should not be forgotten that the large double top that formed during 2007, with a ‘neckline’ the market failed to climb above at the end of February, continues to target an eventual test of 1,176, almost 10% below current activity. Ahead of this level we might expect to see some support from the 1,219 low seen in June 2006. Bulls need to see a break of the bear trendline currently on the chart at 1,355 and in reality a close above 1,382, to recover their composure.