Wednesday 10 April 2013
The one common denominator that crosses all cultures, even religions,
is money. It is the global equalizer. We take a look at the DAX,
Germany's stock market. Do the "precise" Germans fare any better at
investing than at, say, building cars?. Likely not. Money goes to the
core of the human psyche as the fundamental driver for tapping into
the fear/greed element from which few escape, at least when it comes to investing.
Unfortunately, DAX does not have volume, a vital element that shows
the ebb and flow of two incredibly important principles, supply and
demand. Why it volume so important? It shows the effect from the
cause factor of investors/traders making buy/sell decisions.
You may see two daily bars of equal price range and close, and theyappear to be equal. When the volume factor is added, one bar with
volume of 15,000 shares and the second bar with 120,000 shares, they are far from equal. The lesser volume shows a lack of demand, the
other a force of demand that convey very important information for
With that handicap, let us proceed to what the DAX may be saying at this random point in time.
For German readers unfamiliar with how we analyze markets, it is based on current developing market activity and compared to historic
activity, using the factors of price, shown by size of range and
location of the close, informing us who won the battle between
buyers and sellers. The other critical factor, volume, is missing. As a
consequence, some of the analysis will lack more pertinent detail.
Not many look at Quarterly charts. It is our starting point as a
reference and context when compared to the progressively smaller
time frames. What we want to see is a synergy from one time frame
to the next. It does not always exist, but when it does, it makes an
analysis more compelling. From whatever time frame once views a
market, it is important to be aware of support or resistance on the
next higher time frame. The higher the time frame, the more controlling is the chart. What jumps out immediately is the persistent resistance
that started with the 2000 high, stopping the rally in 2008, and now
price is retesting that same level. The first Qtr, 2013, second bar from
the end, was the smallest range since the 2011 swing low. The narrow
range tells us demand was weak, otherwise, the range would have
extended higher. The location of the close, mid-range the bar,
confirms the weak demand because sellers were present, as would be
The First Qtr 2013 looks weak, and sets the stage for how the other
charts may appear.
Note the TR, [Trading Range], just prior to arrow 1. The inability to
rally above the high established in 2000 said demand was weak, and
once again, you see how small the ranges were for the bars
attempting to rally. Weak demand opens the door for supply to enter,
as sellers note the inability of buyers to extend the rally. An analysis of volume, during the TR may have made the "red flag" potential clearer.
The size of the decline, at 1, shows how sellers took control with EDM, [Ease of Downward Movement], erasing the previous 12 month's effort in just a single month.
The arrow at 2, shows small ranges, a lack of demand, and closes in
the middle, telling us sellers are meeting the effort of buyers each
month. As it did in 2007, this can open the door for sellers to rout
buyers and carry the market lower.
Compare the length of time for the EDM, in 2008 and early 2009, with
the length of time for price to recover back the retest to the 2007
high. This is an example how a protracted effort tells us that the
market is relatively weak.
What can be said is that the current trend, for the past few years, is
up. The question is, can it sustain itself in view of what the message
of the market has been since 2000? All we are doing is making factual
observations, letting the market tells us what to expect, moving
At no time is there any discussion or consideration to fundamental
factors, country or world situations. All of that information shows up in the charts, and it becomes a matter of "reading" the message from the market itself, the most reliable source of all.
When you look at the net gains from each swing high to the next
swing high, it is apparent that the upward momentum is laboring.
Almost all of swing high "C" has been a struggle, a lot of sideways
movement. It is at a support level, as defined by the weekly time
frame, and you can better understand why it is so important to be
aware of the next higher time frame.
The weekly is above a former resistance line, now acting as support,
whereas the monthly shows all the current activity under important
The first week of March was a wide range bar up with what appears to be a strong close. The second week, fifth bar from the end, was very
small. What happened to the buyer's effort? It disappeared. What
looked like strong demand may have been an exhaustion rally, instead.
We cannot say for sure, without the volume story to confirm, but the
2nd week in March is a red flag warning.
The second and third bars from the end show greater EDM, wider
ranges and poor closes. This tells us sellers took control from buyers.
Can they keep it? In an up trend, the onus for change is on sellers;
demand has already been proven by virtue of the trend.
Concern is for the inability of buyers to lift price higher, away from
support. It is critical to observe the how of a market's response. Right
now, price is not responding well to the existing support. After a one-
time spurt higher, as just described, price has returned to the level
from which it had moved sideways from mid-December until the March
Too many tests of support is the market's way of telling us demand
cannot move higher, and support will likely give way. There is no
guesswork here, just a factual reading of the developing market
activity and applying the logic it conveys.
The box captures the sideways trading from mid-December to March.
It formed a base from which a rally can be sustained. How did the rally unfold? In small ranges with not very strong closes, a sign of little
demand effort/ability. Compare the bar ranges in the rally to "A" with
those in the decline to "B."
Based on a series of factual observations, from the Quarterly chart to the current daily, the DAX is at a critical juncture. As an index, it is
telling us to look very closely at individual stocks to make a decision
to remain long, or not, or at least use close stops, [stops being
something stock "investors" for some reason fail to use.].
Volume would have made this analysis more compelling in conclusions,
but one thing is certain: caveat emptor!