CNBC Squawkbox Europe
LET'S LOOK AT THE S&P DAILY CHART
As I am sure you know the indexes had a huge selloff on the announcement of the anticipated rate cut. I had been saying the index needed to break the August low to establish a solid low. I neglected to weigh the effect of rates cuts into my analysis as every time there are multiple rate cuts there have been strong rallies running a minimum of 3 to 7 months, even if the trend is down. There is no indication of a bear trend just a large sideways pattern.
I indicated if the August low wasn't broken then the rally would likely be a secondary high or test of the October high and leave the index at risk again of a larger or more significant move down. The normal time periods for a secondary high is a zone of 7 to 12 trading days and this high came on the 10th trading day of the rally. The next time period is out 30 to 45 calendar days and gets to the first week in January. The 10 day rally seems to short in this circumstance because of the strength of the rally. This vertical move has retraced 2/3rd of the decline in 10 days and not offered the normal week of distribution. Historically the best time for a high once moving up past the first week in December is early January and that could fit the pattern of trend. I've been indicating this fast trend still makes a secondary high possible but it needs to show a struggling move up the second half of the move and that would put the move up into early January. If there is a secondary high in early January the Russell 2000 and possibly the 400 will likely have already hit their peaks and the current rally should begin to have fewer participants.
The key now is if there is significant follow though to the downside. If there is then a secondary high could be in place due to the 10 day time period of the rally. But the odds now seem to favor an early January high so how it trades the next few day will be very important. If the index is going up further there should be very little follow through down after yesterday's decline.
LET'S LOOK AT THE MONTHLY CHART
One of the criteria for a top is an exhaustion, followed by some volatility and a period of time for distribution. That period of time could produce a secondary or lower high or marginal new high but a struggling move up the last half of the rally is how this should appear. You can clearly see that in the monthly chart at the 2000 top. Since I am not looking for a bear trend of that magnitude I wouldn't expect the top to be as large as the 2000 top. If you'll recall the bull trend in the 1940's (which we've looked at many times on this show) had this exact pattern of trending as this bull campaign and did trend down from this point without a larger secondary rally but only a 12 day rally. That is still probable in this index but a move up can still take place for a larger secondary high as long as it starts to be a struggling trend from this point forward. The decennial pattern still calls for the eighth year of this decade to be a positive year but to set that up I still believe there still needs to be a drop below the August low and change the sentiment to be significantly more bearish. The the final drive up to end the bull campaign that started in 2002. The first week in January is always a time window to watch carefully because of the probability for trend change in any year, then March because of the vibrations in time since the March 2000 high.