So much attention lately has been devoted to the “PIIGS” countries and economic concerns, but I wanted to take a special look at Spain’s market index along with the iShares ETF to note a classic Rounded Reversal pattern that could be ending into a likely support area.

Let’s take a look first at the $INP – iShares Spain Index:

This is a textbook example of a Rounded Reversal pattern, complete with perfect arc pattern and lengthy negative momentum divergence preceding the roll-over sell-off at the $52 level.

Seeing this, it’s not surprising at all that price declined in a mirror-image fashion from the late 2009 rally.

While there are plenty educational lessons you can glean from this chart in terms of recognizing and trading the pattern, I wanted to focus on the key support level – or “Line in the Sand” – at the $38 to $40 index level.

This would mark the support zone – where we are now – from the July 2009 lows from which the Rounded Reversal pattern formation began.

Now that the news is out in the open, we could start to see a support bounce here at this level.

However, if we don’t, then look for a potential acceleration to the downside if this key level is broken – it would likely bleed over into other markets, suggesting a potential global contagion is at work.

But before that happens, let’s take a look at the tradeable ETF with symbol EWP:

This time, I’m highlighting a perfect Bull Flag (which actually is better labeled an “AB=CD” Measured Move pattern) that projected a price target to the $52 level – at which price found resistance.

When you see a price come into the target of a Bull Flag and notice negative momentum divergences – as seen above – then that is a great time to exit any long positions and consider getting short on any reversal candles or other signs of price weakness at the projection target.  This is a good educational example of that concept.

The price levels on EWP are almost identical to the Index chart above.

As such, we should monitor the $38 to $40 level as a key support level that would be the determining line in the sand for what to expect going forward:

Bearish Confirmed Reversal under;
“Just a Deep Pullback” if above.

Corey Rosenbloom, CMT
Afraid to Trade.com

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