Despite the bearish undertone to this week’s close, not much has really changed in the markets over the last few weeks. We continue to probe the boundaries of our bear flaggish pattern as the markets come to terms with our new price neighborhood. While many bulls are understandably frustrated or worried that we stalled out this week, as I mentioned a couple of weeks ago it was highly unlikely that we would have a V shaped recovery back to our highs in a couple of weeks.
Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see we are still for the most part in what appears to be a bear flag. Notice the topping wicks on Wednesday’s and Thursday’s candles as we came up into resistance at the top of our channel. This led to Friday’s swift reversal and drop back to the middle of our near term range where we eventually found support at the 20 day moving average. While there is certainly more room to the downside, traders shouldn’t get to bent out of shape about this pullback unless we were to breach support at about the $112 area.
One interesting thing to note is that while flag continuation patterns typically occur within periods of reduce volatility and volume, our current retracement has still exhibited some rather volatile candles as well as some spikes in volume that are atypical of your run of the mill continuation pattern. While the jury is obviously still out on the state of our markets, this does lend some credence to the theory that we are currently in the process of forming a base out of this flag pattern. Watch the price area around the 20 day moving average as we move into next week. If we can find support here and work our way back up to the top of our channel, we are likely to seek out a test of the 50 day moving average somewhere around $125. If we cannot hold here, then look for support at the floor of our channel somewhere around $114-$112. We remain in a difficult environment for swing trading, and I would recommend for traders to continue to value capital preservation over growth until we see better conditions.
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