The stock market looks a little different today than it did last week.

Last Friday, the S&P 500 was trading at new all-time highs. It was above its upper Bollinger Band – which indicates an extended, overbought condition. And, the index was testing the resistance level of a rising wedge pattern on the chart.

It’s usually not a good idea to chase stocks higher into such conditions. So, I suggested folks who were looking to buy stocks might wait a few days before doing so.

Today, while the market has pulled back slightly from last Friday’s overbought conditions, I still think folks will do better to wait a few more days before increasing exposure to the stock market.

Take a look at this updated chart of the S&P 500…

The chart still shows a well-defined bearish rising wedge pattern (the red lines) with negative divergence on several technical indicators. Now, though, rather than bumping into the resistance line of the wedge, the S&P is struggling to hold above the support line.

The index might be able to bounce from here. There’s still room inside the wedge for one more push higher. But, after yesterday’s last-hour selloff – where the S&P gave up more than half of the gains it had made earlier in the day – I’m not convinced the market has enough energy to put on much of a bounce from here.

Instead, if the S&P breaks to the downside of the rising wedge pattern, we might see the market follow the path of the dashed blue line. The index could make a quick decline to where it started the month (2870-ish), then bounce a bit off of that level to relieve what would surely be some short-term oversold conditions. Then it could make another decline towards the 2825 level, which we listed last week as a possible downside target.

As I’ve written before, it doesn’t have to play out this way. After the action this week, though, I like the potential for this pattern to play out.

Best regards and good trading,

Jeff Clark

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