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Bear Market Rules Vs. Bullish Flag Formations

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Murphy's Law says that if something can go wrong, it will. Bear Market Rules say that even bullish chart formations are more likely to resolve bearishly, and while reviewing the sector charts this morning, I saw many examples of this. In particular, I saw a lot of broken flag (and pennant) formations. Flag formations are usually bullish. They begin to form after a sharp advance (the flag pole), and their purpose is to consolidate the rally in preparation for the next leg up. When they do the opposite, it reflects negatively on the sector. When we see more than one sector, it reflects negatively on the market.

Ten of the eleven S&P 500 sectors had price reversals today, four of which came out of flag formations. Wait for the end to see the lone holdout. (*These are all intraday snapshots and do not reflect today's close.)

Consumer Discretionary


Financial

Materials

Technology has a rising flag, which normally isn't a strong bull sign, but in good times is still likely to deliver a bullish breakout.



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So, what sector still offers hope of a positive breakout? Energy, although, that's not the most robust flagpole I've ever seen.


CONCLUSION: With ten of eleven sectors breaking down, it is virtually certain that a retest of the March lows is just around the corner. Bear Market Rules? The lows probably won't hold.

Happy Charting! - Carl


Technical Analysis is a windsock, not a crystal ball.


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Carl Swenlin
About the author: is a veteran technical analyst who has been actively engaged in market analysis since 1981. A pioneer in the creation of online technical resources, he was president and founder of DecisionPoint.com, one of the premier market timing and technical analysis websites on the web. DecisionPoint specializes in stock market indicators and charting. Since DecisionPoint merged with StockCharts.com in 2013, Carl has served a consulting technical analyst and blog contributor. Learn More
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