Step 1 of Rally Over, On To Step 2

The rally started Friday almost exactly on the 664 energy level that I’ve been talking about. Fractal analysis is remarkably accurate at finding these energy levels long in advance. After a strong intraday rally Friday, the S&P 500 rested on Monday, exploded up on Tuesday, and rested again today. It is very common after a big daily move like Tuesday’s to have a day where prices go back down a little, then go back up a little, and end up almost unchanged. I would rather have seen a straight run to 740 to show more stored-up energy, but we must take what we get.

I doubt the S&P can get through the 740 to 750 range without a few days of weakness to consolidate the recent gains. But if this pattern sets up the right way, a little weakness now will lead to a very big upleg in a continuing recovery rally. I am looking for this sort of pattern:

A true reversal pattern comes back down for a final test to rebuild bearish sentiment before the definitive breakout move. For traders, it gives you one last chance to take a position. So look for a pop up to 740, and then a quick drop back to the 714 to 721 area for a brief test that holds. After that, I am looking for a breakout over 750 and a strong rally up to at least 850.

The initial pattern is in place. After some early morning weakness on Thursday, look for another solid upturn to the 740 area to keep this rally on track.