International Stock Market Relationships

02/14/19 05:18:49 PM

by Mark Rivest

Divergences between US, German and Mexican stock markets could forecast the next buying opportunity.

Security: DEU30,MXX,SPX
Position: N/A

If you trade only US stocks you may think it's unnecessary to know how the German stock market is performing. The same mindset could prevail among German stock traders. Regardless of what markets you trade, study of several national stock markets could yield valuable directional clues.

German Vs. US Stocks

Since January 2018 the German DAX index (DEU30) has underperformed the US S&P 500 index (SPX). At the SPX all-time high made in September 2018 the DEU30 had a significantly lower tertiary peak.

Please see the daily DEU30 and SPX chart illustrated in Figure 1. The DEU30 has perhaps the clearest Elliott wave pattern of any national stock index. After the first impulse wave decline from January to February 2018, the corrective wave "two" took the form of a text book Elliott wave Expanding Flat. Subsequent to the secondary peak in May the decline was long and steady — characteristic of a third wave. The rally from the late December bottom retraced almost .382 of the decline from the secondary May top — not the January high. This is an extremely important clue because it's the signature of a fourth wave correction within a developing Elliott five wave impulse pattern.

If this count is correct it implies the DEU30 could break below the December 27 bottom of 10279.20. Note that near term DEU30 continues to be weaker than the SPX. The decline from its December 5 peak has gone below two very recent short-term bottoms while the SPX has yet to break its most recent short-term bottom made on January 28. If the relative strength between the two indices continues, it implies that if the DEU30 breaks its December 27 bottom the SPX could hold above its important low made on December 26.

Figure 1. The rally from the late December bottom retraced almost .382 of the decline from the secondary May top - not the January high.

Graphic provided by: tradingview.com.

Mexican Vs. US Stocks

In July of 2017 the Mexican Bolsa IPC index (MXX) hit its all-time high. Since then it has been one of the world's weaker stock markets. The MXX failed to match the SPX top made in January 2018 and the later higher SPX peak of September 2018.

Please see the daily MXX and SPX chart illustrated in Figure 2. Curiously, after the MXX November 2h bottom it became stronger than the SPX. MXX made a high bottom on December 17 vs. the SPX low and made an even higher low on December 26 when the SPX made its last significant bottom.

This phenomenon of the MXX being relatively stronger than US stocks was noted in my March 9, 2016 article, "Mexico the Secret Bull Market Indicator". In 2001-2002, 2008-2009 and 2015-2016 MXX strength vs. the SPX was a very important clue that at least a multi-month rally may have begun.

Figure 2. Curiously, after the MXX November 26 bottom it became stronger than the SPX.

Graphic provided by: tradingview.com.

Near Term Outlook

The most important stock index to watch in February 2019 is the DEU30. A break of at least one tick below the December 27 bottom is needed for a probable fifth wave down from the January 2018. The supposed Minor wave "1" that began on January 23, 2018, was thirteen trading days and ended on February 8, 2018. Typically wave ones are equal in time to fifth waves. This implies the supposed fifth wave down from the February 5, 2019 top could complete on, or near, February 21, 2019.

If the DEU30 makes a new low for the decline that began in January of 2018, it would imply that this index is in a bear market that could continue at least into 2020. However, after the supposed fifth wave down terminates, a counter trend three wave rally could last for several months. Typically rallies after the first phase of stock bear markets retrace at least 60% of the decline.

If DEU30 makes a new low unconfirmed by the SPX and MXX any time in February to early March 2019 it could be a great buying opportunity.

Further Reading: Frost A.J and Robert Prechter (1985) "Elliott Wave Principle", New Classics Library.

Mark Rivest

Independent investment advisor, trader and writer. He has written articles for Technical Analysis of Stocks & Commodities, Traders.com Advantage,Futuresmag.com and, Finance Magnates. Author of website Four Dimension Trading.


Website:	www.fourdimensiontrading.com
E-mail address:	markrivest@gmail.com

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