Does the EU hold clues to what the US Markets will do?

  • The German DAX is telegraphing that a larger correction is most likely coming.
  • Price will have to rally over the July high from current levels or from lower levels to tell us the dreaded correction is not coming.
  • Regardless of what we may think is the state of the economy, the FEDs and ECBs role, the impact of the Trade Wars, etc we can only let price guide us to make the necessary objective analyses and trade executions.

Correlation is not causation, but when the correlation disappears it is time to take note and figure out what is going on. In this case the German DAX is massively diverging from the United States’ S&P500 (see Figure 1 below) whereas these two indices have moved in lock step for decades.

Figure 1: Germand DAX and United State’s SPX

This “moving in lockstep” is no surprise as both the EU’s and US’ economies are tied to the hip. But since 2018 that lockstep move is gone. Sure the DAX also dropped from October into December 2018, and also rallied from then till now. But in essence the DAX has been making lower lows and lower highs and certainly not new ATHs, whereas the SPX did.

This brings me to the big-picture Elliott wave count I have for the DAX, which strongly suggests the rally off the March 2009 low has ended. Anybody with even the most basic knowledge of EWT can see the DAX complete a clean five waves up (blue I, II, III, IV, V) into the January 2018 high. Since I view the 2000 high and 2003 low as Super Cycle 1 and 2 (SC1, 2); respectively, and the 2007 high and 2009 low as Cycle 1, and 2 (C1, 2); respectively, it means that Cycle 3 of Super Cycle 3 completed in 2018. Cycle 4 should now thus be underway.

Figure 2: Big picture Elliott wave count German DAX (monthly candles). Note the negative divergence on the RSI5 and failing MACD buy cross so far (red circle)

Fourth waves are often the most unpredictable of all five Elliott waves, and most likely (blue) Primary wave-A, B have completed, with price now in the starting gates of Wave-C down to ideally ~9300 for a classic C=A relationship. This could draw out well onto the early 2020s (say around 2021) before Cycle 5 of Super Cycle 3 starts. Cycle 5 should also last a few years, but hold on to you hats when Super Cycle 4 gets going. Then there’s only a SC-5 left to complete the entire German (and entire Western) economic expansion that has been underway for centuries. But, by then we’ll be well into the mid to late 2000s and most of us who read this now will have “past on the baton” so to say… So since, we can’t worry about such “grand schemes” we should focus on what lies directly ahead of us. The daily chart below shows more detail.

Figure 3: Elliott wave count German DAX since December 2018 low

The problem we are facing with the rally off the December low into the July high is that it was only seven waves up. That is corrective, because impulse waves move in 5, 9, 13 etc internal waves. So the preferred view is therefore that indeed (blue) Primary B ended after a clear three (black) major wave (a,b,c) advance.

The only alternate, and hope for the Bulls, I see is that the recent high in May was a 1st wave in the form of a leading diagonal (since the internal waves overlap) and now an irregular (flat) wave-2 is underway to ideally around 11400-11300 before a wave-3 starts.

This would then mean that Cycle-4 already completed in December 2018. However, since Cycle-2 lasted two years, I find it odd from a time-symmetry perspective to see Cycle-4 last a few months. Although from a price perspective the December low was deep enough (almost a 38.2% retrace of all of Cycle-3, which is a typical retrace percentage for a 4th wave), it remains very short as 4th waves are often complex and therefore long-drawn. In addition, the technical indicators on the monthly chart (Fig. 1) do not look too healthy at this stage either.

So what does this long story mean for the S&P500? Simple, the German DAX is telegraphing that a larger correction is most likely coming. How much it will be for the S&P500 is yet to be determined as US markets have been much stronger. Price will have to rally over the July high from current levels or from lower levels to tell us the dreaded correction is over and the markets are running faster and earlier than expected to their Super Cycle 3 tops. So regardless of what we may think is the state of the economy, the FEDs and ECBs role, the impact of the Trade Wars ignited on Twitter, etc, we can only let price guide us to make the necessary objective analyses and trade executions.

Trade safe!

Arnout, Ph.D.


Founder and President Intelligent Investing, LLC 
Vice President NorthPost Partners, LP

Leave a Reply