The markets gapped higher on Friday, only too sell off sharply.  For the first 45 minutes, the markets sold hard.  Then, light volume took over.  The markets floated sideways to higher creating a beautiful in spirit of bear flag. This pattern can be seen on charts of the S&P 500, Dow or Nasdaq.  It can also be viewed on the SPDR S&P 500 ETF (NYSE:SPY) as shown below or the PowerShares QQQ Trust, Series 1 (NASDAQ:QQQQ).  Stocks also showed this in spirit of bear flag in many charts.  To view this same pattern, look at the chart of Apple Inc. (NASDAQ:AAPL) or Research In Motion Limited (NASDAQ:RIMM).

What does this overall pattern mean?  An in spirit of bear flag pattern is a high probability pattern that dictates a coming down move.  The recognition of this pattern has been utilized by me to make countless dollars in the last few years.  While this pattern was forming all day on Friday, something else was afoot that had to be watched.  This factor was extremely light volume.

After the in spirit of bear flag formed all day long, the 3pm ET time frame hit.  The markets started to move lower, showing an attempt of the pattern to play out.  However, no sooner did the markets hit the first minor support level, the volume failed to push it through.  The flag pattern could not break lower and thus stalled out.  The markets bounced back higher.  Volume is a key to the markets and patterns playing out on the downside.  Friday was a great example how the pattern started to play out and then could not quite finish do to volume.

Did the pattern fail?  No.  The pattern is still intact, though weakened.  Watch Monday for volume in the markets.  Should that show up, the markets have a solid chance of continuing the pattern.  If the volume remains like last week, the pattern will likely fail.

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Gareth Soloway
Chief Market Strategist

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