SPX Daily Chart H&S Two Leg Bear Flag

Note the H&S pattern playing out; 1375 top (head), 1250 neck line, 1125 target. Also, we watched the negative divergence (red lines) set up in late April accurately calling the top. So price has been using the 1120-ish level as support for a month now, 1101 was the 8/9/1 intraday low, and markets have been range bound sideways producing a consolidation bear flag between 1120 and 1220. Note that the stochastics was the only positively diverged indicator that created the intial bounce after the August waterfall crash (green line and arrows). All other indicators want to see lower lows, and that is the kiss of death for this chart. Note the red circles all showing lower indicators, this means price has to come back down to print matching or lower lows than the 1119.46 closing low and 1101.54 intraday low. When that occurs you look back at the red cirlces and compare the indicators again to see if positive divergence develops but that is off in the weeks ahead, let's stick with the here and now.

On the bear flag consolidation zone, the last two highs over the last couple weeks are at about the same price level. The thin green lines show how all the indicators were long and strong a couple weeks ago indicating that price needed to come back up for a matching or higher high--it is questionable as to whether that was achieved with the last high but no use getting hung up on that. This area is that 1220-1225 bear flag top a few days ago. Further on the price move over the last week, the indicators show RSI neutral for the move, MACD and money flow long and strong wanting to see price come back up again to at least 1200 or higher, but MACD histogram and stochastics want to see lower prices moving forward. A mixed bag.

Talking targets, the first leg of the bear flag pattern (pink), let's use the 1375 top to 1125, that is 250 difference, thus, if the second leg truly started from 1220, then 1220-250=970 target.  Interesting since 987 is very important S/R to Keystone.  If we use 1375 and 1100, that is 275 difference, then using 1220 again, 1220-275=945. Only addressing the waterfall aspect of the crash shown by the pink lines, use 1350 as the start of the first leg. Thus, 1350 down to 1125 is 225 difference, thus, 1220-225=995. Also, 1350 to 1100 is 250 difference so 1220-250=970. Now your head is spinning since you have not seen this much math since high school.  This exercise is to identify a target cluster for the second leg of the two leg bear flag pattern if it plays out. The targets are 970, 945, 995 and 970, with 987 as critical Keystone support. The average of the targets is 970 but 987 will put up a big fight, so 970-1000 serves as a target area for the second leg down in the bear flag, should the pattern play out.

 Note the strong support area at 1020-1040 providing a landing zone for price, however, our targets are all slightly lower.  1010 was the July 2010 intraday low. Thus if the second leg of the bear flag started from a higher number, say 1230, that would bring the target range to 980-1010. No need to confuse the issue, the long and short of it is that the door is open for price to come back up to the 1200-1230 area again in this near term, say over the next three weeks. But, the writing is on the wall, price must come down again to satisfy the red circles, and this can happen quickly moving forward, or after the bear flag continues with consolidation, but the end result is the same, a target zone between 970 and 1040. 1010 is critical support as is 987.

The days ahead (very short term trading) are highly dependent on the outcome with Greece's default (calm default versus messy default with contagion) and Italy's growing crisis. The SPX, and equities in general, move opposite the direction of the dollar and in the same direction of the euro, thus, if the euro is falling (bad Euro news), so are U.S. stocks.  Watch the following asset relationship for the linkage of the classes; euro down=dollar up=equities down=copper down=commodities down=gold down=treasury price up (yields down). And of course the visa versa if the SPX is moving up, say, if happy talk comes out of Europe with bailouts and the ability to sweep some of the dirt under the rug.

Thus, target for the weeks and months ahead is 970-1040, more specifically is 987-1010. In the short term, however, do not ignore the possibility of a price move back up to 1200-1230 to further complete the bear flag consolidation, with this potential move entirely dependent on the news out of Europe. If Greece and Italy turn ugly, the lower targets will be coming a lot faster as the globe rolls over. Once the 1101 low is ruptured, buckle up since the ride is going to get intense quickly. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here or any links connected to this information. Consult your financial advisor before making any investment decision.