Tuesday, 22 June 2010

11:03 BST - DAX - A look at what its recent strength may mean for SPX

Will we see a new rally high in the Dax - if so, does it mean SPX will also make a new rally high?

The recent strength in the Dax of late has been undeniable. Yesterday it came close to invalidating the count that has it topping on 26 April 2010 along with the other major indices, as you can see from this daily chart:

DAX Daily chart:

It backed off the 26 April high and closed below the 6300 level yesterday. 

If it were to take out the 26 April high, that would put it out of snych with the bearish counts on the other major indices. In that case, the more bullish alternative marked on the chart might come into play, meaning we are in another zig zag up from the 2009 low. That would also open up the possibility that that is where we are also on SPX - I have a count for that possibility (see Option 5 on the 60 min counts page).

However, as strong as the DAX has been, it wouldn't surprise me if it does not exceed the April high, so we can still count a [i], [ii] down. As you can see from this weekly chart showing the 2007 top in the DAX,  it can have very deep 2nd wave retraces - pretty much reaching the start of the 1st wave:

DAX Weekly chart, 2007 top:

Of course, if it does get above the April high, it might just mean that the Dax is only now completing the expanding diagonal shown on the daily chart, which would be followed by significant declines, perhaps seeing it catch up with the other major indices -after all, back in 2007, it topped out in July. SPX on the other hand topped out in October, but they came back into synch after that right down to the March 2009 low. Here is a weekly chart showing these indices at the 2007 high. I've labelled the drop on each down to intermediate wave (1). You can see that by minor 2 of wave (1) down, they had got back in synch, despite the different topping dates.

SPX/DAX Comparative Chart of 2007 Top:

So, I'm not sure that a new high on the Dax, if it were to occur, would necessarily mean that we would have to start thinking that more bullish counts are also in play on SPX. Also, despite the depth of the retracement of the decline since the April high, a new high in the DAX for the rally since March 2009 is by no means certain.