I wrote this technical analysis for SeekingAlpha on February 1. It was not published, so I am fully sharing it with my followers.
Until the last hour on Friday before the market closure it was not clear what direction DAX preferred. In the last hour the German index pushed down hard and closed the day, the week, and the month in a very bearish way, if you look at the resulting candles from the Japanese candlestick theory perspective. If you add few technical indicators and Elliott Waves to the picture, the outlook does not look bullish at all. Let’s explore the hypothesis from various angles.
The freshly painted monthly candle makes a classic Dark Cloud Cover together with the December’s candle. It is strong enough for a reversal and would require a confirmation. If February closes below the low of December, we could see a decline for several months.
The weekly produced a Bearish Engulfing, the strongest of the bearish reversal candles, that entirely engulfed the previous four weekly candles and closed below the 8-week EMA line. If the next week closes in red, I would expect a multi-week decline after.
One hour before the close, the daily candle was pointing for a potential reversal northbound. However, in the last hour it transformed into a bearish continuation candle that managed to close below the 50-day MA and helped to make an 8/20 daily bearish cross. If you combine the signs from all time frames, one would be very bearish for the next couple of weeks and, possibly, months.
Elliott Waves Projection
On November 28, 2020 I analyzed the DAX chart using Elliott Waves theory and the channeling technique and forecast that the German index would hit 13800-15000 in the next 1-3 months.
The DAX reached 14132 on January 8, 2021 and has been declining since. I believe that DAX started a very long term correction and is currently in wave (A) of IV as pointed on the chart below.
If this indeed was the wave IV, I view that the stock could possibly fall to the level of wave (4) of the lower degree, 8300 or about 40%. There is also a possibility of a typical retrace to the 0.382 Fib level, 9600, or about 32%.The whole wave IV would likely be more complex. At this point I am anticipating a flat structure which would support an alternating principle for the corrective waves. Forecasting the duration of the corrective waves is the most challenging task in Elliott Waves. However, with the support of the channel, I am thinking that the wave could take 1-5 years to fully develop.
DAX vs SP500
Would the possible correction in DAX have an impact on the SP500? I have been following the DAX and SP500 for multiple years and I view that there is a great correlation between them. In order to convince you I made a side-by-side monthly and weekly charts of DAX and SP500 for the last three years.
I believe this is the case when a picture worth a thousand words.
If a candlestick practitioner looks at the SP500 monthly and weekly candles on this chart and compares them with the candles that were made prior to the reversal in February 2020, they would notice that the probabilities of the reversal in January 2021, especially from the weekly perspective, is a bit higher than that of February 2020. Would it materialize in the upcoming weeks and months? If this week closes with a bearish candle, perhaps it would.
This was post #100. Time for a little celebration!