Guest Blogger DV34 is eyeing possible resistance in the French Index. Here are his thoughts

While scanning the markets this weekend I found an interesting situation forming on the French CAC-40 index

While I am aware the ECB has started QE and this is generally bullish for stocks, technically there are resistance levels above that could possibly offer a short term opportunity on the short side before resuming the uptrend

I will use the ‘top down’ approach on the macro timeframes to show the big picture and what I see

Disclosure: I have no position on the CAC-40 at present but will be watching it closely in the coming weeks

Some quick reference diagrams showing a Bearish Gartley and a Bearish Butterfly Pattern

Gartley and Butterfly diagram

CAC-40 Quarterly Chart

Click to Enlarge Click to Enlarge

There is a bearish gartley pattern on the quarterly chart at a long term trend line going back to 2000, given it is a quarterly chart it is simply indicating ‘zones of interest’

CAC-40 Monthly Chart

CAC 40 Monthly

There is a lot happening on this monthly chart….so bear with me

  1. a) The first thing you see is that there is a clear 5 wave structure shown in the blue lines

  1. b) 5 wave structures are often related to trending/ impulsive moves according to Elliott wave theory… which suggests that any pullback is likely to be limited to the downside in a 3 wave correction of some type or a flat sideways correction

  1. c) This 5 wave structure has the “rule of alternation” shown between wave 1 and wave 3

This rule basically states that if the first wave is retraced by 61.8% (point 2) then point 4 is likely to end at 38.2% of the 3rd wave or vice versa - which it clearly has here

  1. d) Seeing it is a clear 5 wave structure and we have all 4 wave points in place we can now run Fibonacci extensions according to Robert Miners Fibonacci work, in order to do this we:
  2. i) Measure from the start of the 5 wave advance to point 1 and project it upward from point 4 using 100% + fibonacci extensions (100%, 127.2% 161.8% etc)
  3. ii) Measure from the start of the 5 wave advance to point 3 and project it upward from point 4 using 38.2%, 61.8%, 100% etc

iii) Create an external Fibonacci retracement from 3-4 using any Fibonacci extension >100%

  1. iv) Look for cluster zones where levels overlap or are very close!!

Note: For those interested in learning more about this technique, a good place to start is Robert Miners book High Probability Trading Strategies which I think is worth a read as I own a copy myself

CAC - 40 Weekly Chart

CAC 40  Weekly

Ok, drilling into the weekly chart we have a bearish butterfly ending fairly close to the origin of a major drop back in 2007 which has not been retested since

With the uncertainty around what impact ECB QE will have on this index this may all be ignored and it may simply push through as the US markets did, but if it reaches this yellow band I will be looking for shorts for a position trade lower possibly to end below the point 4 offering a nice R:R opportunity

Definitely one for the watch list!

Hope this helps and all the best

DV