Soon after the markets opened on Monday, the German DAX decline to 10 424 in response to Italy’s “No” vote in the referendum. But instead of continuing even lower, the index skyrocketed sharply to the upside and is currently trading slightly below 10 940 after almost reaching 10 950 earlier today. And while the DAX is surging towards the stratosphere, post-factum explanations of why is it doing so vary from the assumption that the referendum result was actually not that bad on one hand to OPEC’s production cut agreement on the other. The problem is that the surge has already happened and traders cannot profit from the past, so who cares what the reason behind the rally was? Fortunately, we as Elliott Wave analysts do not have to rely any kind of external information and neither do our clients, who received the following forecast before the market opened on Monday, December 5th.
As visible, DAX’s strong advance did not came out of the blue at all. The chart above was providing all the necessary information we needed to form a bullish opinion. According to the Elliott Wave Principle, the direction of the trend is indicated by a five-wave pattern, know as impulse. Also, every impulse is followed by a three-wave correction in the opposite direction. Once the correction is over, the larger trend resumes in the direction of the impulsive sequence. Now, take a look at the chart above one more time. If shows a five-wave pattern between 10 024 and 10 801, which was followed by a (w)-(x)-(y) duble zig-zag correction all the way down to the 50% Fibonacci retracement level. So, we thought the 5-3 wave cycle was complete and the uptrend was ready to resume this week.
Which it did. The point is that news does not rule the market. If it did, cycles would not occur, because bad news would produce more bad news, leading to an endless plunge. On the other hand, positive news would have led to more positive news, thus paving the way for infinite inflation. Neither happens in real life, because the market has its own laws, while news is nothing more than noise in the system. It can affect the markets only for a couple of days, at best. Here, the referendum result caused a small decline in the first few hours on Monday. Then, the natural market forces took the DAX almost to the 11 000-mark. Trying to predict the news and its impact on the price of financial instruments is, in our opinion, impossible. The good thing is that with the help of the Wave Principle, the natural path of the market is not so unpredictable. This week’s surge in the DAX is just another example of that fact.