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September 26, 2008

CNBC SquawkBox Europe
by Bill McLaren

LET'S LOOK AT THE S&P 500 INDEX CHART AND A FEW PROBABILITIES

Has there been a climax of bad news yet? There has been the Bear and Lehman bankruptcies, the Freddie, Fannie and AIG bailouts which now look like a down payment and now the financial Armageddon scenario promoted by government administration officials to enable them to loot the treasury of a trillion dollars for a handful of their constituents just before a change of administration. Can their strategy of motivation through fear work once again? We are back at the fear levels that can bring in a low. Let's look at the chart with the most important and highest probability resistance levels we've seen in a long time.

Technically there are now two things that really matter to prove this climax or possible exhaustion of the trend is complete, if not the trend resumes at the same speed that bought it here. First is how far can this rally go. As we always do the range is divided into 1/8 and 1/3 with ¼ of the range down at 1244 and 3/8 at 1300 and extremely important. If the index can trade above the 3/8 retracement level of the range (more than a day or two) for the bear campaign at this stage of the trend it would indicate the down trend is complete. It doesn't mean the index can't come back for a higher low after a 60 calendar day rally and that would likely happen but it will indicate the bear campaign is complete. If it cannot recover that that price level of 1300 the bear trend will remain intact. If the index turns down at ¼ of the range then the fast trend will resume.

NOW LET'S LOOK AT SOME PATTERN OF TRENDING

There is one very important point on the chart now and that is the last low on the 24th at 1180. If that is broken it could indicate this last rally was a rally against the trend and the down trend will resume. But there is a high probability confirmation if that occurs from the next rally. If it does break that low and the next rally can recover or moves back above that low at 1180, then the indication is the down trend is complete even if the index does go back down. Breaking below that level and being able to recover that level is the key to the next two months. I've drawn both those scenarios on the chart. If it does break that 1180 level and move back above it any further move down will likely be a higher low. Then of course the index could just move straight up from here and move above the ¼ 1244 level. If that can occur then the 3/8 division of the range will tell us if the bear campaign will resume. But also keep in mind the index will correct down from that level the first time against it. That is also a high probability. You will need to qualify if that move down is a trend or just a counter trend sell off.

The next week or two will go a long way in telling us the next six months.

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 © 2004-2009 Bill McLaren

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