SPY Flag -- Still Awaiting Confirmation

09/15/03 10:39:24 AM

by Matt Blackman

On September 2, the chart pattern on the SPY broke out on higher volume giving a bullish signal. But the 102-support line was broken a week later. Until we see higher volumes and a sustained move above 105, we remain in no-man's land.

Security: SPY
Position: Hold

In my article, "Break Out the Cigars -- It's a Flag!", I described how the consolidation pattern on the Standard & Poor's Deposits/Receipts (SPY) had broken above 102 on September 2, on increased volume. All we needed to confirm the bullish flag pattern breakout was a 3% rise above 105 and growing positive volume to show that buyers were jumping on board.

In a move that shows why waiting for confirmation is so important, the equity penetrated back down across the 102 line closing below it on September 10. The next two days witnessed moves across it but closes above 102. Without a close and confirmation above 105, it is still anyone's guess where this will go.

A break of the green 45-degree trendline and close around 100 with a break of the 14-period CCI trendline (see middle ellipse) would signal further weakness and put us into a potential bearish quadruple top pattern (see Figure 1).

Figure 1 � Daily chart of the SPY showing triple top or flag pattern with bearish confirmation line at 93 and bullish above 105. Traders will be watching the green trendline and CCI trendline carefully for signs of support or penetration.

Graphic provided by: TradeStation.

For those who entered a long position, stops should be carefully watched. If the security puts in a higher low from here and moves up to make a higher high, the trade will have been a good one.

However, if lower volumes prevail on the NYSE and both economic and earnings reports disappoint in the coming days, a correction will result. There are growing signs in both the Commitment of Traders (COT) and insider sales data (see Insider Sales Tell a Troubling Tale) that the pros and insiders are selling in increasing numbers, which does not bode well for a return in the coming weeks to the uptrend that we have enjoyed since mid-March.

As this trend has been driven in no small way by Fed printing presses operating at full speed, money supply will play a significant role in the sustainability of this rally. Any significant decrease in it or increase in interest rates could cause the much-awaited correction, especially considering the record levels of debt that have amassed since the 1990s.

Suggested Reading:

Blackman, Matt [2003], "Break Out the Cigars -- It's a Flag!" Traders.com Advantage, September 5

Blackman, Matt [2003], "Clue Hunting Through Commitment of Traders' Data," Traders.com Advantage, August 28

Blackman, Matt [2003], "Triple Top Or Flag?" Traders.com Advantage, August 28

Blackman, Matt [2003], "Are You Trading On Borrowed Time?" Working Money, August 12

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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