13.10.2011 - DAX, mystery solved!

It seems so irritating and absurd that the German index DAX reached 6.000 points yesterday even though Slovakia did not vote for but against ESFS.

As I said: it's not bad news that pull markets down, but uncertainty. Market price behaves in certain ways in certain situation. We don't have to think why, but when!

If we have a look at the 10-years DAX chart everything becomes crystal clear!

There is a mysterious regularity in chronology of events after a rapid price decline.

Sequence of events:
1) Price drops incredibly fast in a short period of time
2) RSI turns red -> reference point
3) Price rallies 30% to 50%
4) Price drops 30% to 50% below the reference point (RSI = red) - to the underlying trend


What's happening at the moment? Let's check it with the list above!
1) Price drops fast: check
2) RSI turns red: check
3) Price rallies 30% to 50%: check?

We do not know for sure when the rally is over. But you can layer the sequential pattern of end 2002 on top of the current price rally (see analysis chart). Doing this will result in an "aha" experience. What's more important is that we conclude that price will increase to approximately 6.400 points. However, we do not want to miss an opportunity to short this index. The 6.000 point mark could be a burden.

It should be crystal clear what to do with that index finally: Short on the next sign of weakness (6.000 - 6.400) and go long when it reaches the underlying trend (4.500).


Have a good trade and do not forget to stop by tomorrow, when it comes to a high quality analysis of Dow Jones Industrial Average.