Since the SPDRs S&P 500 Trust Series ETF (SPY) found support at $110.27 four weeks ago the 38.2% Fibonacci level of the uptrend measured from the March 2009 low — its been tracing out a Bearish Flag formation. The objective for the Head & Shoulders top reversal pattern at approximately $114.89 was surpassed during the decline.
Note on the following weekly chart that resistance last week was found at the confluence of the following: near the 38.2% level of the July 2010 uptrend, the 50% retracement of the July 2011 downtrend, the top of the channel line identifying the Flag, and close to the 55ema on the weekly chart. Volume has been declining during the bounce/formation of the Flag.
The Flag could continue to develop over the coming weeks, bouncing off support of the uptrend line and rallying again up towards the top trend line. It’s possible it could get up towards the neckline of the Head & Shoulders top, which would put it very close to the 61.8% Fibonacci retracement of the early-July downtrend, the 200ema on the daily chart, and the top channel line.
Regardless, a bearish breakout below the lower trend line would be a little more reliable if this Flag takes some more time to develop. If the downward momentum continues to carry the SPY lower in the short term it could run out of steam by the time the lower trend line is reached. A bearish breakout of the Flag has a better chance of following-through if the decline begins close to the lower line after a period of minor consolidation. Conservatively, the target for the Flag is approximately $98.78. (www.etf-portfolios.com)
