German DAX Forms Rising Wedge

04/28/03 10:55:56 AM

by Arthur Hill

Here is an ABC rising wedge for the German DAX.

Security: DAX
Position: N/A

The rising wedge has been a prominent feature in the US bear market over the last two to three years. With the big European markets closely following the US market, it should come as no surprise that the German DAX has traced out a rising wedge over the last two months. As with the S&P 500, the DAX peaked in Dec-02 and declined until mid-March. While the S&P 500 managed to hold above its October low and forge a higher low in March, the DAX broke below its October low and recorded a seven year low in mid-March.

Taking further cues from the S&P 500, the DAX hit bottom in mid-March and mounted a sharp advance from 2189 to 3001. That's a whopping 37% gain in less than two months. While the advance looks impressive on a percentage basis, the high at 3001 marks a Fibonacci 62% retracement of the prior decline. In addition to this normal retracement, the advance looks like an ABC reaction rally and 3000 marks support-turned-resistance extending from the Oct-Nov lows.

Figure 1: Daily chart for the German DAX.

Graphic provided by: MetaStock.

The evidence for a bear market rally is stacking up, but the medium-term uptrend has yet to yield. There are three items to watch for signs of a bearish reversal: a break below the lower trendline of the rising wedge, a support break at 2700 and confirmation from a momentum indicator. As long as the lower trendline holds, the medium-term trend is firmly bullish and thinking bearish would be premature. In addition, MACD has yet to break below its signal line and remains well above zero. Should the trend reverse with a move below 2700, the prospects would be for at least a test of the March lows, if not a move to new bear market lows.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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German DAX Forms Rising Wedge

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