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November 29, 2007

PowerLunch Europe
by Bill McLaren

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

The Abu Dhabi Investment Authority gave Citigroup $7.5 billion dollars for a 4.9% stake in the company. This brought on a rally yesterday which didn't move above any resistance. If there is no follow through today, the index will continue with the fast trend down. This type of trend should need a capitulation to end and I don't see any evidence of that occurring yet . Because of the magnitude of the move down another counter trend rally could occur but it will very likely not exceed 7 days or 60 points. The index needs to break the August low to generate enough bearishness to find a more solid low.

NOW LET'S LOOK AT THE NASDAQ 100 DAILY CHART

There are some high probability patterns that occur while trending that indicates highs, lows or continuations. One of them is something I refer to as "Trading against a Spike." You can see the large spike down from the false break top. A 4 day move of that magnitude will need to be consolidated with a rally. If the index is going lower it will generally do so within 4 to 7 days and if it doesn't then a base pattern will have formed and a larger rally or even a change in trend can take place. When that type of pattern fails t create a low it creates a probability for a very fast move and this case it would be down. So the index should have taken off to the upside after the 5th day down and it didn't. The point I am trying to make is the NASDAQ holds the key to this short term trend. This is a pattern for a low but if it falls out of the bottom of this pattern then a capitulation style of move down will follow--in all the stock indexes. But now this is a pattern for low, when bullish patterns fail the result is a fast move in the opposite direction. The same can be said for bearish pattern, if they fail the result is a fast move up. So now there is a bullish pattern and the resolution of that patter will tell the short term trend.

LET'S LOOK AT QUICK LOOK AT THE WEEKLY CHART

Remember what we have been looking to occur for the past year is a large sideways pattern and the August low is quite obvious as support. A bounce would likely occur at the price level but will only be temporary. The index will need to break that level to get enough bearishness to end the down trend. Just like it needed a new high to end the rally.

NOW LET'S LOOK AT THE DAX MONTHLY CHART

Most tops start with an exhaustion high. Exhaustions are easy to see because the monthly ranges while the index is exhausting are larger than the rest monthly ranges throughout the trend and that occurred here. If there is a top there will be a period of distribution which will consist of a choppy sideways pattern as occurred in 2000 or a lower high or what is referred to technically as a secondary high. It appears the DAX could be working on producing a secondary high. This will be the first time there has been an opportunity for a lower high since the 2004 correction but that was way too early in the trend to produce a top. This is not the case now. There is no evidence of this being complete but it does present a probability for top for the first time.

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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