CNBC Squawkbox Europe
LET'S TAKE A LOOK AT THE S&P 500 DAILY INDEX
Last week I warned you not to get too bearish even though I forecast the next high would be 12 trading days from the low. The technical extremes that were hit at the exhaustion low in August indicated "fear" at an extreme level. Those technical extremes tend to take some time to work off. Since the index held its March low that also established a horizontal level of support and offers a probability of running to the previous horizontal resistance or testing the high. The retracement of up to 2/3rd of the decline is also quite large for a secondary high.
Everything in these markets are probabilities there are no certainties and time cycle represent probabilities. The reality is the pattern of trending and the normal pattern of trending for a period of distribution are "three thrusts" that show a weak trend. A weak trend can be defined because the moves down go deeply into the run up and well below the previous swing high, as this move has shown. You can see how last weeks high failed on the 12th day of the rally as forecast and fell 4 days, well below the previous high. That represents a weak trending structure.
There are two probabilities here set up by the pattern of trending and the internals. The index moves marginally above the 12 day high which completes the three thrust distribution and resumes the downtrend. I've drawn that on the chart. Since a rate cut has already been put into the market when the news of a cut is confirmed on the 18th that could complete the pattern. This has been a blue chip rally on light volume so it isn't all that pretty.
Since the consumer would be the problem for the economy look out for consumer sentiment-there is a preliminary reading today.
LET'S LOOK AT THE NEXT S&P 500 DAILY CHART
The next probability is to continue the horizontal move with a test of the old high this will be confirmed if there is support on top of last weeks high. You can see at the July high there was a one day counter trend and that made the failure or "false break" pattern for top easy to see. So how the index trades over the next week will be very important for forecasting the future. I still can't see a new leg up but a larger pattern of distribution would be normal following the exhaustion in August. If there is a test of the high this would likely be followed by weeks of choppy sideways distribution before it is completed. September 25 could be significant but the 5 year cycle around October 10th is very important. The July high was 5 years from the July 2002 low. Six to nine months of distribution before changing trend is normal for this index.