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Charts suggest stocks near inflection point?

Wednesday, 28 Aug 2013 | 6:27 PM ET
Off the Charts: Dow bottom next week?
Wednesday, 28 Aug 2013 | 6:25 PM ET
Mad Money host Jim Cramer digs into chartist Carolyn Boroden's opinion of where the S&P 500 and the Dow Jones Industrial Average are headed next week. Boroden thinks based on the length of the Dow's past declines, it could find a bottom sometime mid-next week.

(Click for video linked to a searchable transcript of this Mad Money segment)

With stocks selling off 2% earlier in the week, then bouncing on Wednesday, should you position for a rally? Or further declines?

There are plenty of negatives looming over the market including geo-political uncertainty in Syria, Fed tapering, a potential stalemate over the debt limit and higher gas prices.

However, as they were with the Fiscal Cliff, concerns may be overblown.

When the potential for a rally seems almost as likely as the potential for a greater pullback, pros such as Jim Cramer often consult with technical analysts to see what chart patterns suggest.

For the following analysis Cramer turned to Carolyn Boroden of FibonacciQueen.com.

Looking at the price action, Boroden says if the rally in the S&P is going to resume any time soon, then the index needs to hold above the low it made on June 24th, that's 1560.

However that may be more likely than not.

Roy Ooms | All Canada Photos | Getty Images

She sees two floors of support propping up the S&P between where it as now, and that potentially lethal 1560 level. First, she says there's a key Fibonacci level between 1615 and 1621, which she thinks could be a floor of support. And then slightly below that, she sees a second floor of support running between 1578 and 1582.

On top of that Boroden sees another pattern she considers bullish.

Boroden measures the length of prior swings in the S&P, and then extrapolates forward to find dates when it seems likely the market could change its trajectory. Over the past two years the S&P 500 has dropped for somewhere between 20 and 23 days before the decline ran its course and the rally resumed.

Now, so far this current sell-off has lasted for 18 days, so Boroden thinks if the pattern holds, the current pullback could end in just 2 to 5 trading days.

When taken together, Boroden believes those patterns provide powerful reasons to believe the S&P is near its low.

However there is a caveat. Boroden says that if the market doesn't make an intermediate bottom during her time window—basically over the next week—then the chart is broken. And a broken chart would be a bearish development.

That would mean investors could be facing a much steeper correction going forward.

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Technical analysis from Dan Fitzpatrick would suggest a steeper correction is actually more likely than not.

Fitzpatrick is more focused on the moving averages and he points out that yesterday, the S&P 500 did something really bad, it completely broke down through its 50-day, something every chart-follower out there regards as being extremely negative.

Through the end of the year Fitzpatrick believes the 50-day will be a ceiling for the S&P. And he also believes the 200-day, which is around 1560 will form a strong level of support.

Therefore, he thinks the S&P is more likely range bound than anything else. However, that means the market could fall another 4.5% or so before the pain ends.

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