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CNBC PowerLunch Europe

September 3, 2008


Last week I though the index could start the move up to the 1340 objective and complete the counter trend rally and resume the bear campaign. But it may not run to that level. All it had to do was move above Friday's high and it couldn't. This does leave the index vulnerable to a fast move down. Yesterday was an outside day down and looks very dramatic and quite bearish. If there is follow through to the downside and last weeks low is broken it will look like the down trend has resumed. I still believe it is too early in time and the retracement is too small to resume the down trend. But that conclusion is based upon historic probabilities; the reality is this could be starting down from lower highs with a very small ¼ retracement. This leaves the downtrend in a strong position IF this starts to trend down. The normal retracement for this circumstance is a 3/8 retracement of the entire range down to 1340. If the index starts down from a ¼ retracement with only a 45 calendar day move up off the low it would indicate the down trend was very strong and could be entering the last leg down, which is always the fastest leg down. We have looked at the 1969/1970 downtrend as a probable roadmap for this bear campaign. We'll review that again as a roadmap next week if this week is down. The reaction down in stocks may have been related to the uncertainty created by the huge moves down in commodities and currencies. Remember I've been saying the trend in commodities is down and indicated last week that Monday could be the next high in gold. But the gaps were so big in commodities a consolidation is likely the next few days.


Last month I indicated the 100 would move above the high of August 12th and at that point it would become at risk of resuming the downtrend. You can see the index is in a weak trend up with the new high in August immediately falling below the breakout point. It would have been bullish if the index could hold that August 12th price level and move up but moving below that level is an indication of weakness within this rally and possibly a completion of the rally. I thought this index could also move higher and end this rally with a larger exhaustion up. But it also has a cycle that can end trends between 45 and 48 calendar days and this is turning down at 45. So turning down and dropping below the high of the 12th of August should keep our attention and any indication of trending down as a counter trend of one to three days should be viewed seriously.


The last leg down in a normal bear campaign is the fastest leg down. They can be short in time but they are also very fast. The last leg down usually comes from a weak rally, in fact the rallies get weaker and weak as that leg progresses. So if the index does turn down from the level it could indicate a fast trend down. I don't know if that will occur but turning down with this small a retracement in both price and time does offer that fast trend, last leg as a probability. I am going to be surprised if it set up that way but you need to be alert to this probability even if it appears to be remote. The daily chart with an indication of trending as a lower high or one day rally that fails could set this scenario in motion. A new high this week would indicate the exhaustion phase was in place. But this does not look very health with the last thing on the chart is a one day rally that just failed.


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