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August 28, 2006

Stock Market: CNBC Report
by Bill McLaren

CNBC EUROPE

LET'S LOOK AT THE FTSE DAILY CHART

There are a few things that are notable about the daily chart. The index is still being held back by the "last low before the final high." There are now three thrusts up after the low. The last thrust may not yet be complete. But anytime an index shows three thrusts below a high it is at risk of reversing. Unlike any of the previous rallies after a high was established at anytime in this bull campaign, the first correction had gone deeply into the rally as illustrated by the red arrows. So because of those large retracements I consider this a weak trend. If the index can show a low on top of the recent highs then it could be going into a vertical move up and my caution would be wrong. Also because each of the corrections down has been smaller it may have to exhaust the support with a spike up. But for now I believe the index is at risk of a run back to test the July low after this pattern is complete. This last high was 90 days from low and is a cycle for strong resistance. The more significant 90-day cycle is 11 September and could set up as an important high if it can either exhaust or move sideways into that date. So remember, even though it cannot "get legs" you can also see the moves down have been less and less in points so the character of this trend since the June low could still show an exhaustion rally or spike up into the first week in September and then I'd be worried about a sharp rundown. For the stock indexes I believe this will be a year of consolidation and 2008 will be a big bull year.

NOW LET'S LOOK AT THE S&P DAILY CHART

You can see there are also three thrusts upward below the high as in the FTSE only this is currently holding on top of the previous high. Since we are looking for this to become a sideways pattern that means this rally can go to between ¾ of the range down, which it is now moving against, and up to a ¼ of extension of the last range up. So now that the index is within that zone of price resistance we can look for a high. Unfortunately it is a large 53 point range and that is the best I can do for now. But because the consensus became so bearish during June and July I believe their needs to see some further distribution before a correction. This current resistance is 90 calendar days from a low but the more meaningful 90-day cycle would be out to September 12th. Notice how there was a wide range down on Wednesday and no follow through to the downside on Thursday and Friday showed a weak rally. Breaking Thursday's low after a weak rally of one to three days would be an indication of lower prices but not necessarily a run back to the July low yet, we still need more time to expire. It is also sitting in a strong position resting on top of the previous high so as with the FTSE a spike up is possible. Volume is drying up as it does this time every year. But even in view of that seasonality there is still vulnerability to a few wide range days down, I've learned not to make excuses for volume (it is what it is). So this week let the index show the direction-looks to me like up into September 12 but it needs to get by this light volume week.

CNBC ASIA

LET'S LOOK AT THE TOPIX DAILY CHART

Most markets will run out a one, two and three year cycles numerous times throughout a decade. This appears to be such an instance. This chart is posted on my web site so you can study it further. The one-year cycle breaks into 1/8th and 1/3rd in "time" just as we do with the price of ranges. This leaves September 3 to 6 and October 3 to 6 as important vibrations in time.

In order for this pattern of trend to turn into a distribution pattern and show a run down to test the June lows will take more much more time. There are a few other points in time we'll look at next week.

NOW LETS LOOK AT THE DAILY CHART AND THE PATTERN OF TREND

This same analysis we're now going to look at can be applied to many markets today from the metals to the other stock indexes. IF this is a top forming or if there is going to be a pattern to confirm another run to the lows, the July high needs to be broken with this move down. I've drawn on the chart the minimum retracement necessary and the pattern to confirm a move down. Normally, if this rally off the June low is going to fail, the rally will have three thrusts below the high and large retracements because the move up needs to be weak if it is a distribution pattern. So far there are two thrusts since the June low and one deep retracement. There needs to be another fairly deep retracement. If this current move down can hold a small retracement and not move down below the July high, then there is something much stronger going on than I can see. But once there is another large retracement and a new high above this level as I've drawn on the chart, then the index becomes vulnerable to a significant run down but only after that pattern of trend is complete and after the date of 12 September.

LET'S TAKE A QUICK LOOK AT COPPER

As with most exhaustion moves this one ended with a 90 calendar day cycle low to high. Now the question has been is the current trading a secondary or lower high to be followed by a fast run down to take back that last leg up. I believe it is but following the huge blow off trend a good deal of distribution needs to take place before a trend reversal can occur. Most distribution patterns don't test lows as this has not been doing but hanging up above the low struggling each time it makes a move. In the vernacular of my industry it cannot "get legs". Sometime around September 12th that will change and any weakness after that date could bring in a breakdown through the June lows.

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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