Bear and Flag Pennant III

Since String and I posted on the bear and flag pennant market theory a few weeks ago I have gotten a lot of positive response. So based on your interest, as I have for the past few weeks, I wanted to give an update.

If you want to catch up on the previous discussion check out the following posts to review the old charts. Thus far the ideals have held up pretty well so investigating the theory for yourself and learning how to use it may be worth your time. Remember though before you get started there is no way to know exactly what will or will not happen in the markets, as with any type of forecasting nothing is 100% accurate.

1. The Original Bear and Flag Pennant Post

2. Bear and Flag Part Duex

Here is the original chart with the most recent market data included:

Chart Compliments of www.stockcharts.com

The beginning of the backside of the bear pennant noted above started officially on February 13th when we broke through 820 in the S&P 500. I wrote about this break in on February 10th, after the market ran down to 827. I wrote about it then because the market had broken the trend line we had drawn to the bottom side of our pennant; although admittedly this line was originally drawn in haste and should have been inked more near to the 820 level. After this move the market ran down perfectly in accordance with the theory. Again, this doesn't mean it will always be this way, it just is now, it is a theory after all and not a proven fact.

Since it is just a theory the ideology allows for adjustment as material external factors change. If you've been reading for the past couple for days you'll recognize that I have posted on our leaders frequently being on TV. In addition there have been other "abnormal" market news releases (ie bailout information, nationalization, bank stress tests, various statements, etc.) which can materially change the timing of market moves. Although these things have happened I do not think the following presentation will change significantly over the long term. I am a believer that the market will do what the market is going to do. This means these external factors may only be factors for the short term but will ultimately fade.

From February 10th, 2009

After this table, in the previous post, I gave a downside prediction range on the S & P 500 index of 640 to 670. Based on how the market is reacting currently, and the way the downside run on the pennant is flattening I am more inclined to think that the run down (should it continue; I think it probably will) could only reach the 670 level. Often times in downturns the market hits resistance, and then rallies upwards, before continuing downward further; an example of this took place on Monday, February 23rd. The overall trend here is still down though and I doubt highly that any corrective move will break the 820 level in the pennant's base. If that were to happen this example of a pennant and theory would be broken until another incident occurred in the market for analysis.

Tomorrow and Friday will be critical to watch if you are analyzing the bear and flag theory. Before the end of the week the market will most likely pick a direction and give more insight into it's overall directional strength. If it chooses down I'm sticking with my 670 prediction for the long term, but don't underestimate this hesitation. The hesitation happening now is a bit concerning if you are looking for a quick downside move and the theory to hold in the very near future. If the market chooses up, I'd be inclined to adjust my original downside move prediction from the table upward by about 30 points to around 700. I'm basing this adjustment on the shallowness of the initial downward movement relative to what the theory suggests should have happened.

All in all remember that this theory is interesting and appears to have some merit in this particular instance. It's clearly not an exact science and no one can predict the future of the markets but it certainly is fun to try.