We’re finishing the week a little different from how we started it.

Last Saturday, following Friday’s big stock market decline, we took a look at the S&P 500 and figured the 3% drop in one day was no big deal. The index had simply pulled back from resistance on the chart and was testing support.

We guessed that if support failed, then stocks were in for a tumble. But, if support held, then the S&P was likely to bounce back up towards the resistance line on the chart.

Well… as it turned out… support held, and the market bounced. The S&P closed yesterday nearly 80 points higher than where it closed last Friday. That’s a big gain for just four trading days. But, once again… really… it was no big deal.

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

The index is still stuck inside its monthlong trading range. All that has happened this week is the S&P has bounced off of support and is now challenging resistance. It’s the opposite of the condition we looked at last Saturday.

So, where do we go from here?

Once again, we’re looking at two possible scenarios…

If resistance holds, and the index turns back down, then we’re probably going to test support again. And, like the little kid jumping up and down on a frozen lake, the market might just break the ice on this next test.

But, if the market can break through resistance on this current attempt, then we’re likely to see a very fast rally up towards the 3000 level (or maybe a bit higher).

There’s probably not enough energy stored up to fuel a rally to new all-time highs (above 3025). But we could certainly get a fast move higher that punishes all the folks who’ve been loading up on put options and helps to shift investor sentiment from bearish to bullish.

I’ve been arguing for an upside breakout from the current trading range. And I still think that’s the more likely scenario. And I also think that will set the stage for a more meaningful decline later in September or October.

We’ll talk more about that possibility if and when the breakout rally unfolds.

Best regards and good trading,

Jeff Clark

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