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The German DAX has been lagging the S&P 500, the S&P 500 made a new all-time high while the DAX turned down below its all-time high [13789]. It is not clear if the DAX will make a new all-time high because the pattern during the latest decline appears to be a falling wedge, this could be the first wave of a larger decline.
This type of pattern can occur in an uptrend (correction) or in a downtrend (in the first wave of a larger decline). If it is a pullback in the uptrend the DAX will rally to new highs. Either way, it is a bullish pattern. If it is the first wave of a five-wave decline the next move will be the second wave up and this wave will end below the September high [13460].
The DAX declined to 12500 and is now rebounding. The initial decline from the top to 12753 is in three waves [(a),(b),(c)]. In the context of a trend reversal in line with FTSE 100 and S&P 500, this decline is wave i (circle) of a falling wedge because in a falling wedge the first wave is in three. The rally for wave ii (circle) is in five waves where the fourth wave overlaps the first, this is the signature of an upward correction and it ended below the previous high.
In the case of a falling wedge we expect wave iii (circle) to be in three or seven waves (double zigzag). Here it is a double zigzag [(a),(b),(c),(x),(a),(b),(c)] in seven waves. This suggests the decline will extend today because wave (c) of the second zigzag is not yet complete. A potential target is 12400.
This move down will complete wave iii (circle). The next move is wave iv (circle) up, the target is 12900.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
