Bear Flag and Pennant Part II

Last Thursday I touched on Bear Flags and Pennants and tried to offer some insight into where the S & P, overall equities markets, and economy may go. After just a few short days it now looks as though (thus far anyway) my charting buddy String and I may be right.

Today the equities markets dropped big after the Obama/Geithner/Congressional Announcements so we pulled the following charts to show you how we stood with our original bear flag and pennant ideas. Keep in mind that these graphs were initially put together on January 30th and held static through today. Note how the market has hit the lower trend line almost perfectly from February 1st through today. Also notice how the market has not broken the upper trend line. What was strange about this particular set up that was stumping us was the elongated sideways movement after the flag set up. We feel this occurred because of the governments discussions and their affects in the market. Today though the market may have decided it was fed up with Team Obama's antics and here's why:

Chart Compliments of http://www.stockcharts.com/

Now the "cleaned up" version so you can see the trend line on the bottom leg of the pennant more easily:

Chart Compliments of http://www.stockcharts.com

Based on the move down in the S & P today of nearly 5% the index finally broke our established trend line so this is why I am thinking we have begun our journey. If you read the last post you now know that if you follow the theory behind bear flags and pennants, after the market converges or shows a flag (as it is/has now) it is likely to set up for a drop or gain in the direction of the initial move that took place in the market you are tracking; In theory this move should be roughly half of the initial directional move. Keeping that in mind and using the first chart above I am expecting the S&P to move downward to around an index value of about 640 (to be safe lets call it 670 but it could go as low as 640).

Why? Lets do the math using the flag and pennant theory:

Without saying anything more the following may or may not be true:

1. We may be at the beginning of the last big move before the economy bottoms out. (I doubt it but maybe) In general trying to call a bottom is a fool's errand and I don't suggest anyone ever try to do it; never try to call a top either for that matter. I like to always trade the middle 60%, never go after the top 20% or bottom 20% of a market.

2. I could be totally wrong and the market could turn, this is only a theory and it is not a proven fact. The Flag and Pennant theory is one of many ways to guess at the future market direction of any financially traded symbol, index, or commodity. The S&P has a nice set up right now for this idea and I think the theory is something fun to play around with.

3. Only time will tell us what happens, if the market does collapse you saw here first that the Obama administration had a shot. Spending won't get us out of this mess but a good plan might have restored some confidence and held us steady; the market wanted good news and hesitated to move down for nearly 2 weeks with no fundamental basis. Unfortunately though our current political leaders, just like those before them have let us down again.

Stay tuned and hold on tight.