Chart Analysis on S&P (Mike Paulenoff)

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At the beginning of last week, when we were going through the process of discovery and extrapolation as a potential topping pattern progressed from a "megaphone" to a "diamond" and then into a breakdown, the two optimal downside targets that we identified all along were 1140 and then 1110-1100. When I look at the hourly chart of the S&P 500 via its emini contract, I cannot help but notice that the stair-step decline last Wed-Fri exhibits a "normal" downleg formation if we eliminate the "mysterious plunge" from around 1113.50 to 1056.00.

If you allow me to invoke a bit of artistic license here, what I find I can get my mind around after looking at millions of charts and patterns since 1980 is that the "orthodox low" of the decline from the April 26 high at 1216.75 actually occurred at 1090.75 Friday morning. Again, when we view the period of weakness from 1216.75 to 1090.75, eliminating the "crash event," it has the "right look" of a well-proportioned, completed bearish downleg that since has experienced a recovery rally back to a key near-term resistance plateau between 1160 and 1180, which for the time being has thwarted the upmove.

Ok, so if you indulge me about the "orthodox" pattern, now what? My hourly pattern work indicates that if something important ended on the downside last Friday at 1090.75, this morning's weakness should hold above 1132 and then loop to the upside for a climb above yesterday's recovery high at 1162 into the 1180 area next. Such a scenario will leave behind a bullish "construction" from 1090.75 to 1175/80 (for example), after which I will be looking to buy pullbacks once again.

Conversely, if the e-SPM fails to climb above 1162 before it declines beneath 1132, my pattern work will argue that the entire bearish, or corrective, period off of the high remains intact and dominant, and points to a retest and a possible violation of 1090.75 on the way to a "normal, non-crash event" next target zone of 1060/50. Today could be a pivotal session for the indices, and will confirm to us if the intermediate-term bull market or the near-term correction has the upper hand.

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