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CNBC Europe Report

Today we're going to look at three helpful concepts that can strengthen ones understanding of chart movement and apply those concepts to current charts. We're going to look at "false break" patterns and "bounces from the obvious." Most world stock indexes look the same at this moment.

LET'S LOOK AT THE NIKKEI

I've been saying this bull campaign would end with either a 90 or 144 calendar day cycle from low to high. You can see the NIKKEI ended with a 90. It also broke to a new high and created a major "false break" pattern by breaking to new highs and reversing. I say major because this was visible on a weekly chart. One of the rules for "false breaks" is fast moves and even changes in trends come from false breaks. Which is why, much of the time, buying breakouts and selling breakdowns from the "obvious" support or resistance is poor strategy and can entail huge risk and therefore poor strategy. Notice the index went down 6 days and rallied 6 days and within 2 days it was back bouncing off the obvious low.

NOW LET'S LOOK AT THE DAX

Notice all the minor "false break" patterns for lows while trending up. So you can see the significance of any pattern is determined by the direction of the trend. Double bottoms almost never end downtrends but are powerful lows while trending up-so which way is the trend? Notice the current bounce up from the "OBVIOUS" low. There are two points on this chart where the index would be at risk of another fast move down. Those are a weak rally of 1 to 4 days up from the "OBVIOUS" (the normal time period for a counter trend rally) and a false break above the last 5 day rally. As the Nikkei, this Index is now two days up from the "obvious."

NOW LET'S LOOK AT THE S&P 500 INDEX

This index only retraced 3/8 of the move down. A 3/8 or ¼ retracement keeps the trend in a strong position for the next move down which is why this index went to a new low unlike the previous two indexes we've viewed. Remember the direction of the trend determines the significance of the pattern so the possible false break low is in place and a true "false break" creates a fast move so any failure here would indicate a down trending market. So this index is at risk of resuming the downtrend 1 to 4 days up this last low or if it tests the 4 day rally high for a double top within a down trending market.

I still believe we have a good probability to test the February high as in the 1946 roadmap and would complete a distribution pattern, after this decline is complete. Then the bear campaign will follow. Last week I thought the maximum move down for this leg would be 1352 but this pattern is indicating a possibility of 1331. But for now I need to let this pattern of trending this week determine the next few months as I've just described.

Last week I indicated the FTSE had exhausted the rally and would need to consolidate the move up and after the correction it would be back testing the rally high at the end of the week. It didn't test the rally high and the correction down was stronger than I had anticipated.

 

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