Hello and welcome to CantosCharts. I'm Hemal Darjee trader at Fat Prophets. Today we're going to be looking at the S&P500.

Now, this index has declined in excess of 10% since the May highs as European sovereign debt fears continue to increase. Now, volatility has also picked up over recent weeks and this sort of index has continued to reach fresh highs which is not sort of too surprising. So the question really remains for investors is, is this actually an opportunity to buy on a dip or ultimately, is there going to be another leg lower to the downside.

So looking at the charts first of all we can see that the S&P500 has declined quite sharply since 2008 from 1,576 down to 1,666. But since the year 2009 we've seen an uptrend develop which has been fairly encouraging, but the recent price action over the last few weeks has actually deteriorated the outlook with the index falling down below this rising trend line. We've also included a Fibonacci pullback retracement level between sort of 50% and 61.8% which is typically where we expect pullbacks to occur, but we will come back to this a little bit later on in the piece.

Looking at the daily chart now and looking at the price action since the start of the year, we can see that the type of price action has been fairly sort of choppy and we haven't really trended higher or ultimately, trended lower. It has only been over the last few weeks or so that we've seen the index actually break through a healthy band of support between the 1,250 and 1,260 region which has actually seen the index fall substantially lower and more importantly, also breaking below the 200 day moving average which is a pretty important technical level.

Now, looking at this chart we can see that a topping pattern has actually developed and we've also labelled an SHS which ultimately stands for head and shoulders which is typically a bearish pattern. Now, we've had support in this 1,250 to 1,260 region and that actually illustrates the neckline. So prices have fallen below the neckline, falling down as low as 1,100 and the index has actually lost quite a bit of upward momentum, especially from a broader standpoint.

Having a look at the price action over recent months, now it is taking a slightly closer look, we can see that the decline between July and August was pretty impulsive, so we've had successive days where the market has closed lower.

What we've also labelled on here is actually an Elliott wave pattern. Now, for the people who sort of watched our sort of clip last month you would have noticed that we sort of used this type of analysis previously.

Now, what we're looking for in this case is actually a five wave count to the downside. We can sort of label the first three waves with the wave three being the most apparent and effectively the sharpest decline that we've sort of seen so far.

Now, what we're actually anticipating over the coming days is actually a short covering rally to the upside. So we would actually anticipate any buying pressure for the near term to be fairly limited before we actually ultimately see another leg to the downside. So that's sort of our view in terms of where the pullback will actually come to. Typically, we're sort of looking at the 50% to 61.8% region which falls in the region of sort of 1,224 to around sort of 1,250. But, in my opinion, I think we're not going to probably trade as high as that. I think just slightly above 1,200 is where we will see this rally sort of push up to before actually pushing slightly lower.

Now, in terms of how far can this decline actually go down to, just looking back, reverting back to the weekly chart, we can see that the 50% to 61.8% region which falls in the area of sort 1,010 to around 9,950, that's sort of the region we're looking the pullback to come down to.

However, we do have a bit of technical support marked by the 2008 lows which sits roughly at around 1,000 for the S&P500.

So all in all, we expect a short covering rally to the upside over the coming days with one more leg to the downside with support coming into play marked by the 2010 lows.

Today, this has been CantosCharts. My name is Hemal Darjee. We look forward to seeing you for the remainder of the week.