In the 2004 reprint of the book "Prechter's Perspective," EWI president Bob Prechter offered these eye-opening insights into the fallibility of “fundamental analysis”:
"Sometimes, news appears to fit a day's trading so perfectly that everyone 'knows' what the cause of the day's move was. Other times the market does the opposite of what everyone would have expected. This unreliability proves that news is not determining the trend."
You could say that again. On December 9, Germany’s DAX enjoyed a huge, triple-digit rally DESPITE a slew of bad news longer than Al Capone's rap sheet:
- "German's Central Bank cut its 2012 German growth projection saying that a 'pronounced' period of weakness can't be ruled out." (BusinessWeek)
- And: "German exports fell in October more than three times economists' median forecasts... Greater weight should be attached to the downside risks stemming from the sovereign debt crisis." (Wall Street Journal)
A rally against the backdrop of such bad “fundamentals” makes little sense. But as soon as you look at it from an Elliott wave perspective, things look different.
Sometime over the next day or two I expect [European] stocks to bottom and a sharp five-wave rally [to begin]... The pattern is especially clear right now - three waves down from the high and then five waves up from the low that fails to achieve new highs.
Despite the awful fundamental conditions in Europe that traders and even ordinary people are discussing daily, the [Elliott wave] pattern offers a clear signal that stocks are likely to make a rush to the upside soon."
How much upside potential does the DAX have left?