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April 03, 2008

CNBC Europe Powerlunch
by Bill McLaren

LET'S LOOK AT THE S&P 500 INDEX DAILY CHART FIRST

The big question is; is this current consolidation of the downtrend a counter trend rally in a bear campaign or is this a low of some significance?

The bullish aspects currently are consensus or the number of people bearish versus bullish is at an extreme the levels that occurred at the October 2002 low. Also there is an exhaustion and a "false break" of that exhaustion low at a "time" period that is consistent with the completion of similar trends down. And our 2008 forecast called for a (first quarter) March low. IF the trend is going to resume down there are three points left that can complete a countertrend rally. The first is 180 days from high around Wednesday next week. Then 90 days from the January low around April 22nd and moving marginally above the February high will put the index at risk of resuming the downtrend. Those time periods are calculated by studying all the counter trends in bear trend for the past 110 years. Sixty days from low was also a time period for an intermediate counter trend but the index fell four days or a normal correction while trending up so that possibility was eliminate with this rally.

If the index can move past those bearish time periods and pattern of moving above the "obvious" resistance then this low may be something significant. So far the index is trending up from the last low with a one day and a three day count trend move down. The last time there was a consensus reading this bullish and failed was during the 1973 bear campaign that was 35 years ago. Remember I said the "time" that most economist recognized the US economy was in recession was the time the index would start a rally.

NOW LET'S LOOK AT THE DAX INDEX weekly chart

This is an identifiable pattern of trending and a very strong trend down. The top was a three wave, weak or struggling pattern of trending below the June//July highs. That is an extremely bearish pattern and if valid should be followed by a fast move down and it was. This was the same pattern of trending that occurred in the US stock indexes during the 2000 top. This fast trend down was followed by an exhaustion down and another very weak rally. And most recently, a break of the exhaustion low and a recovery of that low setting up a possible "false break" pattern for low. A fast move up should follow a "false break" if that is the pattern. Because of the weakness of the two rallies there is a probability another marginal new low could be setting up at a later date. When the index rallies further into the downtrend and starts down another new low (if that occurs) would set up a very strong low and completion of the move down. A few decades ago I identified that pattern as a three thrust pattern for low. It should not break the trendline I have drawn from low to low. If it cannot rally any further and starts down then there is some kind of water fall decline. But this really looks like either a false break low and test of the February highs or if it does rally and then moves lower it will result in a three thrust pattern for low and not a significant move down. Three thrust movements are struggling trends and are always followed by fast moves in the opposite direction and is the method to qualify if that is the pattern for low. This is a very strong trend down and needs to prove this last low is a "false break" low with further rally. If this pattern of three thrusts is going to materialize the rally from the second low or this low will be equal to or greater than the last rally before it comes down to test and marginally break the last low.

This index lost 22% in 17 trading days and a move that large would naturally need some significant amount of time to consolidate the move down. So seeing a further rally from the false break low would be normal considering the magnitude of the move down. I do not have a good view of the cycles in this index but if the scenario for the US STOCK INDEXES is one of a counter trend in a bear campaign the timing for a high in this index will likely be the same.

Bill McLaren
McLaren Report

Disclaimer: This message is for educational purposes only and does not constitute trading advice nor an invitation to buy or sell securities. The views are the personal views of the author. Before acting on any of the ideas expressed, the reader should seek professional advice to determine the suitability in view of his or her personal circumstances.

Copyright © 2004-2008 Bill McLaren

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