Ideal SPY Bear Flag Completes Intraday with Lessons

Jun 15, 2009: 10:11 AM CST

Just a moment ago, an ideal bear flag trade completed on the intraday chart of the SPY.  Let’s take a quick look at it and learn how Fibonacci could have helped time entry into this trade.

First, the Pure Flag completion (SPY 15 min chart):

A bear flag begins with an initial impulse down (gaps do serve as momentum impulses)and then we had an “ABC” (three wave) retracement up which formed a 45 degree angle (notice the trendlines) retracement.

Now, what’s interesting about this example is that classic technical analysis would have you enter a bear flag on a breakdown out of the lower trend line … but that breakout in this example was this morning’s gap, giving a late entry (but still an entry for aggressive traders).

Your stop would still need to go above the upper trendline just above $95, which might be further away than some people would be comfortable in taking the trade.

The target is still a ‘measured move’ of the initial impulse, which from $96 to $94 gives us a target of $2.00.  I like to subtract the target from the UPPER trendline as opposed to the lower, which gives us a target of $93.00 ($95 minus $2 equals $93).  I’m doing simple math for the example.

Instead of waiting for a breakdown, how might we have entered this trade early and thus maximized our edge?

By being more aggressive and entering at the top of the point where the flag has its “make or break” moment – which usually corresponds with a Fibonacci retracement.

Now, let’s add a Fibonacci Grid and focus on the 50% Retracement:

This trade was better suited for swing traders comfortable with holding short over a weekend instead of a pure day trader.

We begin the Fibonacci grid at the June 12th lows and then draw up to the June 11th highs (your software program might have you draw the grid the opposite direction) but the goal is to find the 50% retracement of the initial impulse or “Pole.”

Notice how many long upper-shadow candles and specifically the shooting star and doji that formed at the $95.15 level, signaling key resistance.  This was your ideal entry.

We had an “ABC” (three wave) move which is clear on the chart that adds a bit more confirmation that odds could favor a down impulse to complete the flag.

You would place your stop about $95.50 which is above the 61.8% retracement – if price goes to this level, it would invalidate the ‘flag’ pattern and thus we would want to be stopped out.

As it so happened, price respected this level and we had our morning gap that continued to the $93.00 target, completing the trade and giving a nice, quick profit.

By combining a 3-wave structure, Fibonacci, and simple trendlines, you can increase the ‘edge’ of your flag trade selections.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “Ideal SPY Bear Flag Completes Intraday with Lessons”

  1. reggie perrin Says:

    even with hindsight this was not an easy trade to enter

    The 'overnight' gap over the weekend and as futures rollover

  2. Corey Rosenbloom, CMT Says:

    Agreed – and I don't hold overnight so I missed it entirely.

    That's exactly why I post these educational comments – the more times we see these patterns and price structures (trades), the better we'll be able to act in real time because we experienced them many times before.

    For the savvy, there were good opportunities via the 4 bearish candles (the last one was a big move up back to the 50% Fib) including a bearish engulfing, doji, and shooting star.

    It would have taken guts but would have paid off – actually overshooting its target – trading's about taking risks, isn't it?!

  3. Dominick Says:

    Hello Corey. In reference to the ABC 3 wave move/structure, I can see where you refer to it on the chart but it really does not jump out at me. Maybe that is just my untrained eye. That being said could you provide us a little more background about it. Where and when it may occur, its implications,etc. Is the “flag” usually formed by an ABC move? Even a link to a prior explanation would be great.

    And if all that wasn't enough to ask…

    Where would Elliot fit into this?

    Mucho thanks.

  4. Dominick Says:

    Hello Corey. In reference to the ABC 3 wave move/structure, I can see where you refer to it on the chart but it really does not jump out at me. Maybe that is just my untrained eye. That being said could you provide us a little more background about it. Where and when it may occur, its implications,etc. Is the “flag” usually formed by an ABC move? Even a link to a prior explanation would be great.

    And if all that wasn't enough to ask…

    Where would Elliot fit into this?

    Mucho thanks.

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