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Inverted Flag
by Carl Swenlin
February 12, 2010
I think the big question for most market participants is whether or not the market is putting in a medium-term bottom. The evidence is truly mixed, and I can make a case for either side of the argument; however, we have sell signals on both the daily and weekly charts, so, for now I think I will focus on the evidence supporting a further decline.
On the chart below you can see that last week there was a sharp two-day decline that found support on the 200-EMA, and formed an inverted flag pole. This week, prices trended upward in a narrow range, forming a flag at the end of the flag pole. A flag formation pointing upward is bullish. Pointing downward (inverted), it is bearish. In this case the implications are only short-term, with a possible downside to the area of 1020.
The On-Balance Volume (OBV) suite of charts below gives both side of the argument, but first let's concentrate on the CVI (Climatic Volume Oscillator). It has become fairly overbought, and it topped on Friday. Combined with the inverted flag, it presents a negative short-term picture.
The VTO (Volume Trend Oscillator) is a medium-term indicator, and it has formed a double bottom in oversold territory. This is fairly strong evidence that a medium-term bottom is near, and quite a few of our other medium-term indicators are in agreement.
As I said, the evidence is mixed, and it is one of those times that we need to rely on the Thrust/Trend Model (T/TM) to keep a level head. Currently in a neutral posture, to generate a buy signal it will need for the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index) to cross up through their EMAs.
Bottom Line: Prices are in a down trend, the T/TM is in neutral, and an inverted flag combined with overbought short-term indicators suggest more downside yet to come. If the S&P 500 suddenly breaks UP from the inverted flag, I would change my short-term outlook from bearish to neutral, and await a new buy signal from the T/TM.
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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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2009 TIMER DIGEST RANKINGS FOR DECISION POINT
#9 Intermediate-Term Stocks (52-Weeks) (TD Index 129.36 Vs. SPX 123.45)
#8 Intermediate-Term Stocks (5 Years) (TD Index 147.81 Vs. SPX 92.01)
#18 Bond Timer (*TD Index: 87.7 Vs. Bonds 83.86)
#5 Bond Timer (10-Years) (*TD Index: 127.25 Vs. Bonds 127.51)
#9 Gold Timer (TD Index: 115.30 Vs. Gold 124.00)
#3 Gold Timer (3 Years) (TD Index: 181.56 Vs. Gold 169.92)
#3 Gold Timer (10 Years) (TD Index: 322.74 Vs. Gold 375.51)
#6 Long-Term Timer (2 Years) Stocks (TD Index 136.41 Vs. SPX 75.94)
#7 Long-Term Timer (3 Years) Stocks (TD Index 141.22 Vs. SPX 78.62)
#2 Long-Term Timer (5 Years) Stocks (TD Index 165.27 Vs. SPX 92.01)
#5 Long-Term Timer (10 Years) Stocks (TD Index 162.51 Vs. SPX 75.90)
2008 TIMER DIGEST RANKINGS FOR DECISION POINT
#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT
#40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT
#11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers and the benchmark index are assigned a starting TD Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year.
Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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