Last Monday, we looked at the 15-minute, 60-minute, and daily chart of the S&P 500 to guess which way the stock market was headed.

The 15-minute and 60-minute charts – where the patterns tend to play out over just a few days – supported the idea of a bounce. But, the daily chart – where the patterns can take longer to play out – argued for lower stock prices.

So, we did what most folks on Wall Street do and guessed the market would go both higher and lower. Though, we walked a little farther out on the limb than most folks on Wall Street and said, “Higher first, then lower.”

That guess proved correct as the index rallied from 3340 to 3420 by Wednesday. Then, it gave back all those gains, and then some, by Friday when it traded as low as 3293.

Today, like the hot gambler at the roulette wheel – having guessed the correct color on which the marble would land – we’re ready to make another bet. This week, we’re once again going to go with “higher first, then lower.”

Take a look at this 15-minute chart of the S&P 500…

Just like last week, we have a situation where the index has dropped to a lower low. But, the technical momentum indicators – the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) – made higher lows. This sort of “positive divergence” is often an early warning sign that the trend is ready to reverse.

That’s what happened last week and the week before. These are the conditions that will likely lead to a bounce in the stock market early this week.

Now, here’s the 60-minute chart…

Unlike last week, when the positive divergence on this 60-minute chart supported the divergence on the 15-minute chart, there really isn’t any divergence this time. The index – and the indicators – are both right about at last week’s lows.

This lack of divergence on the 60-minute time frame suggests that, while the market may still bounce and play out the pattern on the 15-minute chart, any bounce attempt is likely to be weaker and more short-term than last week’s bounce.

Finally, let’s look at the daily chart…

Just like last week, there is no positive divergence on this chart. And, the momentum indicators are still nowhere near oversold levels. So, there’s plenty of room for additional downside action.

The index has broken below the support of its 50-day moving average (MA – blue line) at 3343. So, it and the 9-day exponential moving average (EMA – red line), and the 20-day EMA (green line) are now resistance on any rally attempts.

It’s going to be difficult for the market to mount a strong rally given this setup.

Perhaps the S&P 500 can bounce back up towards its shorter-term moving average lines on Monday, or Tuesday. But, it looks to me like there’s a strong chance we’ll end the week lower than where we started it.

Best regards and good trading,

Jeff Clark

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