The flag interpretation in the U.S. stock indexes is beginning to unravel.

I have been loudly “waving the flag” for another leg down in the U.S. stock. Well, I am beginning to doubt this interpretation based on a well burried sentence in the Edwards and Magee book. I thank reader Andrew for our dialogue about this matter.

A discussion of flags in Technical Analysis of Stock Trends, Chapter 17 (Measuring Implicatons in Chart Patterns) points out that if the flag continues for more than three weeks, the flag interpretation is probably not correct.

We are now in the fifth week of the flag. The Dec. S&P futures punched through the bottom of the flag today and appears to have little follow through.  A close above Friday’s close would put the flag interpretation 70% in doubt, in my opinion. Of course, this flag may prove to be an outlier and still work. But, it needs to work today or tomorrow at the latest.

Does a failure of the flag mean the stock market has bottomed? NO!!!! What it means is that the flag will morph into a larger pattern. The dominant trend in stocks is down. Periods of confusion normally are resolved in the direction of the dominant trend.

Markets: $SPY $ES_F