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FLAGS AND PENNANTS


Another Flag For OEX

08/05/05 09:00:17 AM
by Arthur Hill

The Standard & Poor's 100 formed its second flag in the last three months, and this one may fail as well.

Security:   $OEX
Position:   N/A

The Standard & Poor's 100 (OEX) formed the first flag after the mid-May surge (Figure 1). The index moved above 565 with a sharp advance and then consolidated. Consolidations after an advance are usually bullish, as these represent a rest within the ongoing move. The index broke flag resistance with a gap, but indecisive candlesticks quickly appeared (gray oval) and the breakout failed miserably.

Figure 1: S&P 100
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Flash forward to early August and the index has a similar setup in the works. After a surge in early July, the index consolidated over the last few weeks. The resulting pattern is a flat flag, and a break above resistance would be bullish. The index tried to break out in late July, but this breakout failed to hold. The failed breakout is negative, and further weakness below the flag low would be bearish.

The relative volatility index (RVI) sports a negative divergence, and further weakness could be used to confirm a flag support break. RVI is just like the relative strength index (RSI), except the RVI uses the standard deviation of price changes instead of the absolute price change. RVI formed a lower high in July, while OEX formed a higher high. This amounts to a nonconfirmation or negative divergence. A move below 50 would confirm the negative divergence and turn momentum bearish. Should RVI hold, a move above the red trendline would be bullish.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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