SPX Bear Flag

A bear-flag pattern may be forming on the SPX. Here is a 60-minute (click to enlarge):

SPX Bear Flag 1 11-19-09

The blue line was a high-volume plunge. The purple lines outline a sharp retracement on lighter volume. The red line is the same height as the blue line and is placed at the top of the flag to get a pattern projection. If the pattern plays out, the bottom of the red line is the target. Notice that it’s close to the level of the still-unfilled gap left from the open on November 9th.

On the 15-minute chart below, we see that the retracement, if it is indeed complete, was weak; only being able to muster a bounce to the 38.2% Fibonacci retracement level (Point B). Another bearish indicator is that the opening gap was not filled (Point A):

SPX Bear Flag 2 11-19-09

The next chart shows Fibonacci extensions, and uses the same three points as were used in the flag on the first chart:

SPX Bear Flag 3 11-19-09

What I find interesting is that the 127% extension matches exactly with the close on November 6th, which is where the gap discussed above opened. (The blue horizontal line highlights the connection between the gap and the 127% extension).

That’s the market’s way of telling you: “I’m thinking about filling that gap.” Gaps are targets to which the market gravitates. A 127% extension is feasible because, as we saw on the second chart, the retracement was weak, and the market left behind a gap overhead. Also, all the major ETF’s left gaps behind, so it was a rather emphatic, bearish statement.

Gaps above are resistance, and gaps below are support. So, if you are bullish, you want to go long as prices approach the downside gap.

Of course, there is no guarantee that the market will drop that far, or at all. An alternative scenario would be a 61.8% extension which holds the November 12th low at 1085. Or the market could retrace upward some more on Friday, which would cause all the downside targets to be raised.

One thing to watch for on Friday is for the market to fall in a wedge pattern. That often gives a clue as to how far the extension will go, and is a typical way for a correction to complete.

And since this is a bull market, prices can simply keep going up from today’s close. If this were a bear market, that would be very unlikely, but in a bull market, such “pattern failure” happens all the time.

14 Responses to “SPX Bear Flag”

  1. K says:

    and here’s Daneric on the TED LOL

    http://4.bp.blogspot.com/_TwUS3GyHKsQ/SwXcm3QJFDI/AAAAAAAACtY/Zp0G98lhLtI/s1600/tedspread.png

    I love being the first to use TED and now it’s slowly gaining traction.

  2. 2thfixr says:

    Here’s hoping your analysis is spot on Matt. Fill the gap, fill the gap, fill the gap…

  3. Julie says:

    George,
    Will you and K ride the bus for 4 weeks
    down to SPX 980???

  4. George says:

    Julie,

    I’d get out and push if necessary!

  5. Julie says:

    George,
    The SPX 3X3 gave a sell signal. But the
    more powerful 3 bar is still on a buy.
    You stay in the bus and let K push.

  6. K says:

    Yeah George. I’ll push.
    Here’s my push:

    My $TED Target reached: Increasing short positions. http://bit.ly/2JFxFO

  7. after says:

    Matt, how long have you followed the awesome oscillator ?

    (oh my, look at the time, sleepless here, argh…)

  8. after says:

    as of about 7:45am..
    Futures Prices
    Market Last Change %
    Crude Oil 77.23 -0.82 -1.05
    Natural Gas 4.63 -0.085 -1.80
    Corn 410.75 -3.00 -0.73
    Soybeans 1039 +12 +1.15
    30yr Bond 121.03125 +0.21875 +0.18
    10yr Note 119.65625 +0.21875 +0.18
    NY Gold 1137.6 -4.3 -0.38
    NY Silver 18.205 -0.25 -1.35
    Emini S&P 1086.00 -8.25 -0.75
    Emini Nasdaq 1759.5 -10.75 -0.61
    Emini Dow 10242 -85 -0.82

  9. George says:

    K pushes, I pull… double our effort.

  10. K says:

    no economic news today. care to guess how many banks will fail tonight?

  11. George says:

    November 20th/3rd week * 1/4 moon phase X 2 for good measure = 3.3333 bank failures this weekend.