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FLAGS AND PENNANTS


The S&P 500's Intraday Pennant

10/30/03 08:04:45 AM
by David Penn

An eight-hour consolidation in the S&P 500 helped the market resume its bullish ways.

Security:   $SPX
Position:   N/A

With consolidations like these, who needs Alan Greenspan?

Those watching the S&P 500 on an intermediate, intraday basis (i.e., hourly charts) have noted, perhaps in horror, as the market's late September to mid-October advance peaked just north of 1050 and began to move down. Many bearish observers and commentators, hoping that October -- as it so often has -- would bring the market to its knees, saw in these mid-month declines the beginnings of the bitter (if long-awaited for) end. And as the S&P 500 dropped and dropped again toward 1020, these bears appeared to be carrying the day.


But as has been the case so many times in this cyclical bull market that began in March 2003 (or October 2002 for the Nasdaq), the bullish sentiment proved overwhelming. The first indication that the bulls were far from done in came late on Friday, October 24th, when the S&P 500, which had been trading near its lows for the week, suddenly saw a flurry of buying that drove the market from just under 1020 to just over 1028. This strong close to finish the week was a signal that the market may have bottomed. The long lower tail on the daily chart of the S&P 500 for October 24th was another indication.

This bullish pennant set the stage for further gains as the S&P 500 rallied from the lows of the previous week.
Graphic provided by: eSignal.
 
On Monday the 27th, the market opened strongly, even if it faded somewhat over the course of the day. However, this "fade" was not any ordinary correction; in fact, the fade took the shape of a bullish pennant, a chart pattern that suggested strongly that the bullishness of Friday was quite likely for real and the slight weakness on Monday, merely a buying opportunity.

The pennant, as Thomas Bulkowski describes it in his book, Encyclopedia of Chart Patterns, consists of a downwardly sloping triangle-shaped consolidation that is bound by two converging trendlines. The pennant is very much like the flag formation; the flag differing from the pennant by having two parallel trendlines instead of converging ones. Pennants often occur in fast-moving markets, and provide a brief "accumulation/distribution" zone for new buyers to enter the market and for old buyers to exit. Bulkowski suggests measuring the likely continuation by taking the distance from the beginning of the market move to the start of the pennant, and adding that value to the value at the point at which prices break free from the pennant.

In the case of the S&P 500 provided here, the pre-pennant market move was approximately 12 points (1018 to 1030). The breakout from the pennant occurred at 1033. Thus, the S&P 500 could be expected to move to around 1045 in an initial move up. Interestingly, that is exactly what the market did before the closing bell rang on Tuesday, ending the day at approximately 1046.79.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
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