Bear Flag and Pennant

The following chart was provided to me by a colleague with whom I discuss market events, and economic trends. He goes by the nick name "String", and he has crazy charting skills.


Chart from www.stockcharts.com

As people always do, many are looking for a direction in the stock market right now. Discussion is a buzz about when we'll break out of the recession and start our recovery. Naturally there are literally thousands of opinions on when that may happen, but who's right? If you have read this blog for any period of time you know that I think the recession is going to be deep and long lasting. I have even referred to the period we are working through as a depression (we're getting there U6 unemployment figures here).

In a Bear Market (and a Bull Market) there are various technical theories that suggest pennants and flags can be created through the use of historical data to interpret where the market may move next. The S&P 500 is setting up perfectly for two of these theories right now and I wanted to touch on both Pennant's and Flags as many people don't know what they are.


Pennant and Flag Illustration taken from www.chartpatterns.com

Pennants
Pennant patterns usually appear in markets after substantial moves either up or down. As a result they can be seen in both bull and bear markets. Pennants are thought to be one of the most reliable technical indicators for traders and in some cases indicate trends to come. Typically when a pennant pattern sets up, a big move will occur. After this the market will pause for a period of time to catch it's breath, determine a direction, and then move again in nearly equal severity to the initiating rise or fall, and heads the same direction it was originally going. Pennants also typically have pricing trend lines which appear to be converging. In the graph of the S&P above I have identified in Yellow where I believe a Pennant is setting up.

Flags
A flag is also a technical indicator which is commonly seen as being quite reliable as a tool to indicate future direction. Flags very from Pennants in that they represent an opposing trend relative to the over all market direction. For example in a bull market they would be represented by an overall drop in market prices. In a bear market, as we are in now, flags are typically representative of bear rally's. A flag is also different from a pennant in that it's pricing trend lines appear to run parallel with a slight slope. The break out movement after the brief parallelism of price is considered the "mast" or "pole" hence the idea of a flag. In the graph of the S & P above I have identified a flag pattern with green lines and did not draw in the pole.

Whether or not you follow technical trend analysis one has to consider the pennant and flag scenario which appears to be in the chart above. Unfortunately, by doing so, it looks like things are going to get worse before they get any better.