Stocks tumbled on Friday. The S&P 500 lost more than 2% – erasing all of the gains for the week and igniting fears of an even stronger move lower this week.

But, as I mentioned Friday morning, the three-day rally we got last week increased the odds that the recent correction phase is over. The daily chart of the S&P 500 had rallied to a higher high. Now, all we needed to see was the index form a higher low on the next decline.

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That “next decline” started on Friday. And, if the correction phase is indeed over, then the bulls need to step up right here, right now.

Here’s an updated look at the daily chart of the S&P 500…

The index closed at 2604 on Friday. That’s just below the support range of 2610-2620 I pointed out on Friday. But it’s still above the 2581 closing low last Monday. As long as the S&P doesn’t close below 2581, then we still have the possibility of a higher low.

Here’s how it looks on the 60-minute chart…

The index came right back down to test the former resistance line of the falling wedge pattern (the red lines) as support. That support has held so far.

It’s tough to watch the S&P fall more than 2% in just one day. But you can see how Friday’s decline is right in line with the action we were looking for on Friday morning. So, the potential for a “higher low” still exists.

Friday’s action also created another potentially bullish pattern on this 60-minute chart. Here’s another way to look at it…

This chart shows an “inverted head and shoulders pattern.” This is a bullish pattern that indicates the reversal from a bearish trend to a bullish trend. The “head” is marked at last week’s hourly low of about 2560. The “shoulders” line up well at the 2585 level. And the “neckline” of the pattern connects last week’s high with the previous week’s high at 2670.

As long as the S&P holds onto the recent higher low, then the odds favor a rally back up towards the neckline. And if the index can break above the neckline, then the targeted move – which we get by measuring the distance from the head to the neckline – is a 110-point rally.

That would push the index all the way back up towards the March high at about 2800.

Of course, I know that sounds crazy. Nobody is talking about that sort of a move – especially after Friday’s decline.

But if the bulls step up and buy right here, and the market can make a higher low, then we have the potential for an extremely strong bounce over the next few weeks.

Nothing is guaranteed. And if the S&P closes below the 2581 daily low, then it invalidates this pattern.

For now, though, the setup looks bullish to me.

Best regards and good trading,

Jeff Clark

P.S. To learn more about chart patterns like the inverse head and shoulders pattern I showed you today, Delta Report subscribers can read “The Delta Report Guide to Technical Analysis.” It’s full of all the patterns I use to find trades for my readers week after week.

And to learn more about a subscription to the Delta Report, click here.   

Reader Mailbag

Where do you stand in this market? Will you be one of the bulls stepping up today… or a bear pushing the market down?

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