In a previous post we discussed the worrying signals given by the European indices and what would this mean. We posted charts for DAX, CAC, EUSTOXX, IBEX, and amongst all of them, there was a common 5 wave down pattern. This downward pattern according to wave theory is followed by a counter move, in this case an upward correction. This is exactly what happens right now. Most of these indices are now near the 38% retracement of the entire decline. This can be seen below:
Some indices are near the 38% and others at the 50% retracement. If this is just a countertrend rally and if prices are to fall hard again, then prices should not overcome the 61,8% retracement. Prices bounced upwards as expected in our previous post. In order for this upward move to continue, prices should not break recent lows.
What is then the best way to trade this markets? Assuming you entered long when we made our last post you have two choices. Either close positions at the 50%-61,8% retracements and enter short with the highs as a stop or keep you long positions with the low of wave 5 as a stop reverse. Different traders have different risk appetite. This is just my strategy and it may not be suitable to an investor with a low risk profile. Adjust your trading to your risk profile. For more help trading these indices, don’t hesitate to contact me. For more detailed analysis and more profitable ideas, visit our Premium Services page and buy a subscription.
As always, thank you for taking the time to catch up on my thinking.