Bear Flag forms on US Indexes

I’m sure a great many stock market traders and especially investors were dismayed and potentially shocked by the severity of today’s action in the major US Indexes.

First, we had a large volatility up-day regarding the decision by the Federal Reserve to trim the Federal Funds rate by .25 basis points. Typically, traders expect such decisions to boost the market and usher in a new round of buying. To that thought, I suspect many traders who held their breath for the cut to materialize actually bought shares/took positions following the decision and were greeted with swift profits in most if not all of their decisions.

When the dust settled and new information was digested, we saw a large volatility gap down in the Major Indexes and then experienced an even more severe trend day down, which cut through the 20 period moving average (expected support) in three of the four major US Indexes (the Nasdaq is showing relative strength thanks to Apple, Microsoft, and Google).

An ominous bear flag and impulse sell pattern has formed on the Dow and S&P 500, forecasting a larger probability of a measured move price decline than a rise in prices, from a technical analysis standpoint.

If the Dow (and S&P which shares an almost identical pattern) complete the bear flag (annotated in purple), then the ‘measured move’ action will take the Dow to 13,300, which is only 250 points away (price fell 360 points today. Don’t expect such a large volatility move to happen again so soon). Support may also come from the strong 200 period moving average, which corresponds almost exactly with the ‘measured move’ forecast by the potential bear flag.

If you look at the chart above, the candle pattern looks similar to the “Falling Three Methods” pattern detailed as an example at this post at mGlider.com. Of course, the Dow pattern is more of a “Falling Eight Methods” which doesn’t really exist, but the idea could be the same. A falling three method looks like this (courtesy mGlider):

Whether you interpret the above price action as an Impulse Sell (a pullback retracement following a large volatility or impulse move down), a bear flag, or a falling three (or eight) method pattern, it would appear the most likely short-term price direction is down.

While price could rise following today’s action, the odds as I perceive them seem stacked solidly against the bulls. Bears, it’s time to try your luck and force your hand to see what kind of technical damage you could possibly create on the price charts.

Whether you’re a bull or a bear, be safe.