The S&P 500 has been one of the cleaner markets around the world since resolving its tight range that it had been stuck in since February. What had been a sloppy environment with whipsaws in both directions for about six months broke down cleanly and volatility spiked.

Support was found where demand has been in control in the past (October), and the ensuing bounces rolled over nicely where they should have: at former support from the first quarter (see here). In addition, when markets are in an unusually tight range, as they were for so long, the resolution out of that tends to be volatile in nature, regardless of direction. We see this all the time.

As I mentioned when we first broke down, the new problem that the S&P 500 has is that what was former support for so long now becomes overhead supply. The "just get me back to even" crowd is sitting there ready to sell to you on any rallies.

Here's what I see now:

This is the first chart that had us cautious since the end of the first quarter. This market rallied right up to the 161.8% Fibonacci extension of the entire 2007 to 2009 decline. The market respects these levels, so it wouldn't be responsible of us not to:

Looking closer, here's the daily time frame where support from October held last month and then the broken support in Q1 turned into resistance the past couple weeks. We'll stick to bars to keep things simple. This is the S&P 500 traded-fund $SPY.

Also notice that if S&P manages to get back above the support from Q1, there is still more overhead supply that it has to absorb. This is literally a problem on top of another problem:

So I think this can play out in a number of ways. The most bullish scenario, in my opinion, is that prices are able to quickly get above and stay above that former support from Q1 near $198 and begins to put in a base below that next resistance level near $204.

This would be a healthy scenario, although it might seem frustrating for the rest of the year. It should lead to the best outcome and ultimately new all-time highs in Q1 of next year some time. This is the lower-probability outcome and not one I'm willing to bet on today:

From where we stand today, the higher likelihood here is that we continue to consolidate in a tightening range, like we've been doing for two weeks, and then resolve lower. One of the things that keeps me skeptical of this market is that momentum hit oversold conditions for the first time all year.

We use a 14-period relative strength index that tends to stay above oversold readings during uptrends. We're not in an uptrend if momentum is getting oversold. I think a retest of those lows is the higher probability outcome, which keeps me in a sell-strength mode rather than a buy dips, at least from a more intermediate-term perspective.

I personally look out weeks and months, not minutes and days like some others.

This retest of last month's lows could come with a brief whipsaw to new 52-week lows before recovering. That'd be ideal because it would shake out some more weak hands and that can be it. When those last longs throw in the towel and say, "Ugh, I can't anymore — just get me out!" that’s how bottoms develop.

In this scenario, we'd want to see fewer stocks make new lows. Going forward, the stocks that put in a higher low when the market puts in a new low are the ones that tend to outperform afterward.

A good example is the March 2009 lows. The majority of stocks put in new lows in October of the previous year. That was the actual market low, not March as the indexes would indicate. In November, fewer stocks made new lows, and by the time March came around and the S&P 500 was making its final low, most stocks had already bottomed and began their epic rallies.

Here's the chart I saved from back in the day comparing the S&P 500 to the amount of new 52-week lows on the New York Stock Exchange:

This is clearly a more dramatic scenario, but a good one to keep in mind as we're searching for which stocks and sectors to buy on dips and which to avoid as they'll most likely underperform if they have not yet bottomed out like others.

Backing things up a little, I want to take a look at another outcome that some people might not want to hear. In fact, the bag holders who never sold this year, who now represent all the overhead supply, are the last ones who want to hear this. This is a longer-term chart showing prices breaking the support levels mentioned before and the most recent uptrend lines since 2012 and 2013.

This also adds to the overhead supply as former trendline support also tends to turn into new resistance on kickbacks. A rollover here would lead to arguably the fourth test of support near $182. The more times a level is tested, the higher the likelihood it breaks. Long-time readers of the blog and subscribers to our research know this well:

In the case of a break to new 52-week lows, I'd have to say that we'd likely head under $160, which was former resistance back in 2000 and 2007. This level also represents the 38.2% Fibonacci retracement of the entire 2007 to 2009 decline. It's when these levels cluster together like this that they stand out.

This is the highest-probability outcome. The equivalent level on the S&P cash and futures markets is about 1,575. This would represent a 26% market correction from top to bottom and perfectly normal for a market that went up 220% over the prior six years. I know people will kick and scream about the Fed, China, US President Barack Obama, and whatever other lame excuse they want to make up, but again this is normal market behavior.

In order to invalidate some of the bearish activity we've seen over the past month, breaking all sorts of support levels leaving so much overhead supply to absorb, a quick recovery as outlined in outcome No. 1 above is likely required. Again, this is the lower probability scenario and outcome No. 3 is most likely from where we sit today, but we always want to keep an open mind.

It's the stubborn ones who think they know more than the market that get killed in the end. I always like to come up with multiple scenarios because I know for a fact that I do not know what will happen tomorrow, or ever for that matter.

Today, I'm betting on No. 3. S&P's correct 26%.