On this daily chart of SPY, you can see that it formed a bear-flag pattern last week (click chart to enlarge):
The flag is bounded by the red lines. The blue arrow points to Thursday’s volume, which was the lowest of the week on the one day that SPY closed up. So, both the price and volume patterns match that of a bear flag.
The purple arrow points to the top of the flag channel on Friday to highlight the fact that SPY failed to reach the top channel line. It is possible that SPY has already topped out and the ideal short entry point was at Thursday’s high. However, SPY can move higher and still remain within the flag. Retracements of 50% and 61.8% are perfectly normal, and as we see on the next chart, SPY has not quite made it to the second, 38.2% retracement level:
If SPY is done retracing, then a 100% extension of the bear flag would take SPY down to the 88 area to test the support at its May 4th gap:
SPY has dipped into that gap, the red box on the chart, but has never filled it on a closing basis. So, I would say that it is a support level, though weakened, and a good candidate to be filled by this bear flag. If SPY can retrace upward some more, then the downside target would have to be raised accordingly.
At some point next week, I will likely buy some SPY July $88 put options (SZCSJ). At the moment, this option’s stochastics are oversold on its 60-minute chart, and its 15-minute chart is turning up with SlowK crossing above SlowD, and MACD crossing above zero. So, it already has two amigos, and is only a penny away from crossing above the 9ma for the third amigo. A 9/36/15 cross-up isn’t too far away either:
The 9ma is the black line and the 36ma is blue. The MACD only made a shallow dip below zero, and is now slightly back above zero.
So, the setup looks promising now, but whenever I look at flags like this, I always say to myself: “there will probably be more of a retracement.” On the other hand, if SPY can only muster a 38.2% retracement, then that is a sign of weakness, and may indicate that SPY will exceed a 100% extension on the downside. Maybe it will hit the 127% extension down at 86.
As always with bear flags, you want to see volume decline when prices move up. So, if SPY can rally with better volume next week, then it can invalidate the pattern. But any light-volume rallying will only improve the shorting opportunities.