The bulls certainly have their work cut out for them today. A potential downside “flush” is looking more likely.

Please understand… the term “more likely” does not mean “definitely going to happen.” But, after yesterday’s action, the charts are looking more bearish.

Here’s the daily chart of the S&P 500…

When I first showed this chart last week,  I wrote about how this correction seemed to be unfolding in five waves – A was the first move lower, B was the first bounce off that low, C was the retest of the lows, and D was a second bounce to a lower high.

In this scenario, the next wave (E) could do one of three things. It could form a higher low, drop down and retest the 2581 low again, or flush to the downside in one final, exhaustive move lower to end the correction.

All of those scenarios are still in play. But I’m starting to view the “flush” as a stronger possibility.

Inside of the blue descending triangle pattern, I’ve drawn a red triangle on the chart. If the market closes lower today, it will decisively break below the support line of the red triangle. Based upon pattern measurements, that break would target a decline of between 65 and 100 points on the S&P 500. That gives us a downside target of between 2570 and 2535.

Again… I’m not saying this is definitely going to happen. Who knows? Stocks could find support right here, bounce, and then rally back above point D on the chart. That would be a bullish move and likely confirm the end of this correction phase. That seems unlikely to me – but anything is possible.

It’s important, though, to keep an eye on that red triangle. A close decisively above 2675 would be bullish. A close decisively below 2630 or so will probably lead to even more downside action.

The good thing about this setup, however, is that if the market does flush to the downside then it will likely mark the final, exhaustive move of this correction phase.

Best regards and good trading,

Jeff Clark

P.S. Just a quick reminder to sign up for my free online training event next Wednesday.There you’ll learn how to make winning trades in uncertain markets – a crucial skill for the rest of this year.

Reader Mailbag

As the correction settles, will we return to new highs? If so, how are you looking to trade the next move higher?

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