Excerpt from: “Crystal Ball for Investing and Trading” Book.
Status of the German DAX
The DAX (Deutscher Aktien Index [German stock index]) is a blue-chip stock market index representing the 30 highest capitalization companies trading on the Frankfurt Stock Exchange.
The DAX chart represents the evolution of the German economy, the largest of the European Union and of the Eurozone.
Figure 1.5 shows a 6-day chart of DAX from 1996 to march 20, 2020.
Figure 13.5 – Charts courtesy of TC2000.com
During the period from 1996 to Early 2000, DAX was in a rally mode and went from some 1,300 up to some 8,000. For the period from beginning of 2000 to mid-2011, DAX was in correction mode and produced a contracting triangle with a horizontal resistance and an up-trending support line. However, in mid-2013, it broke powerfully through the horizontal resistance line and gained over 30% until Q2, 2015.
After the correction of 2015, it then resumed its bullish trend to around 14,000 points on February 12, 2020.
From the technical analysis viewpoint, DAX seems to develop a zigzag waveform A, B, and C. Its subwave A, downward, began in 2000 and lasted until the first quarter of 2003. At one degree lower, its sub-subwaves have taken the pattern of zigzag.
Its subwave B started in 2003 to complete on February 12, 2020.
The pattern of reversal should be a head-and-shoulders, with a price of about 8,000 also for the right shoulder. The DAX subwave C should bottom in the area of 1991, or about 1200 points.
The following points are worth highlighting:
- Unlike DJ-30, DAX suffered relatively more severely with its subwave A. It went from a high of 8,136 in March 2000 down to a low of 2,188 in March 2003. This loss represents a 77% correction from the top (76.4% is a Fibonacci ratio).
- Unlike DJ-30, the wave bottom in 2009 remained well above the one of 2003.
- The correlation between DAX and the QE programs are clearly visible.
- Like DJ-30, DAX broke strongly through its resistance line upward in 2013, to start a long phase of throw-over.
- The contracting channel formed by the up-trending support and resistance lines in 2019 announces the end of the trend in the next few months. Based on this observation, the wave must break either through the support or resistance The wave pattern of Ending Diagonal makes Crystal Ball believe that it should break through the support line downward until the predicted bottom of wave C, at around 1,200.
The quality of German products is well known around the world. Germany is a major exporting country with a relatively high trade surplus. The European Countries are the Germany’s largest trade partners, but also the USA and the emerging economies. Under the leadership of German Chancellor Angela Merkel and her Finance Minister Wolfgang Schäuble, Germany has prospered much more than any other European Union countries. Its unemployment rate in 2017 was less than 4% while other nations, for example France, displayed a rate of 9.4%.
According to Eurostat, Germany recorded a Government Debt to GDP of 74.70 percent in 2014 but meanwhile has reduced it to 66.9% in Q1, 2017 thanks to budget surplus. Government Debt to GDP in Germany averaged 66.73 percent from 1995 to 2014, reaching an all-time high of 80.30 percent in 2010 and a record low of 55.60 percent in 1995.
Due to high efficiency of German economy, other Eurozone countries have been continuously pushing to devalue the euro since 2011, pretending that the euro exchange rate is too high against other currencies, in particular, the USD. They argued that high rate of exchange makes the price of their products too noncompetitive for a smooth export in-and outside of the eurozone.
However, Germany has been arguing that the problem of other Eurozone countries with poorer economic conditions and trade balance is not caused by a high value of euro, rather by inefficient national labor regulations and weak economic structural conditions. Germany’s argument is justified by the fact that, if the euro valuation was too high, why Germany can produce a substantial trade surplus.
This argument is also used by Switzerland, which enjoyed a continuous economic growth and stability over decades despite ever-appreciating Suisse Franc. In September 2012, the ECB chair announced a kind of Quantitative Easing (QE) program like the one of the Fed. However, the German experts believed that such programs were out of scope of the ECB mandate and therefore, resisted the implementation of such measures.
However, the Court of Justice of European Union (CJEU) decided on January 13, 2015, that such programs are well within the ECB mandate under certain conditions. After this decision, the ECB announced on January 22, 2015, a massive QE program to purchase over €1.5 trillion of assets. Consequently, the euro lost over 25% of its value against USD over a short period of time. At the same time, the Suisse National Bank (SNB) surprisingly un-pegged the Suisse Franc (CHF) from euro.
Why do the German citizens fear the QE-type of monetary programs? First, they have proved that they can export goods and services even with a “strong” euro. Second, the German economy suffered a hyperinflation between 1920 and 1923. In 1920, the price of one gold mark was some ten paper marks. However, in 1923, the price of one gold mark skyrocketed to over 1 trillion paper marks. This example shows (1) why the economic stimulus by monetary policies alone, through money printing, cannot produce healthy economic conditions in the long run and (2) why the QE programs could result in a catastrophic loss of trust in the fiat currencies, and in hyperinflation.
The ECB QE programs are going to reveal ineffective in the long run, and the forthcoming depression, very painful.
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