Corey Rosenbloom: We’re hearing much talk about the potential Bear Flag pattern on the S&P 500 Daily Chart.

Let’s take a mid-week update on the pattern and note the current key price boundary levels to watch for clues.

First, here’s the S&P 500 Daily Chart trendline structure:

Moving from right to left, we see the current “Bear Flag” consolidation pattern stretching from early June to present.

The lower rising trendline resides near 1,340 while the upper rising trendline continues near 1,390.  The 30-min chart below emphasizes these trendline levels.

Now, moving to the left of the chart, the last time we saw a similar Daily Chart ‘flag’ struture was from August to October 2011.

While price did break the downside trendline, the full downside target was NOT achieved due to a power-rally which developed off the 1,100 Index level.

From there, price structure continued to trade mostly in a “Creeper” uptrend, bound by the prior “flag” trendlines until the breakdown of May 2012.

Here’s a current intraday perspective of the current Flag Trendline boundaries:

Again, this post focuses mainly on the trendline boundaries which extend from 1,340 to 1,390.

With the exception of a few minor Bear Traps (initial breaks that reversed back inside the structure), price has traded consistently between the dominant ‘flag’ trendlines.

The implication for the near future is that price will continue respecting (trading between) these boundaries, which suggests a continuation rally toward 1,380 or 1,390.

If so, we’ll all assess whether price continues its upward movement with a surprise breakout above 1,400 or else stalls and then trades lower toward the new lower trendline target.

That would be the “Trendline Continuation” thesis.

The alternate or Bearish thesis would be seeing something similar to what happened in September 2011, as seen in the chart below:

What I’ve tried to recreate in the chart above is the “step-inside” the Daily Chart flag pattern from August to October 2011.

We see a similar, better structured, parallel trendline channel from August until September 2011.

I pinpointed the potential “Fork in the Road” point where the market stands currently:

Either the market will continue trading within the trendline structure or else we’ll see a ‘failure’ and potential outcome similar to that of 2011.

In the case of 2011’s Bear Flag/Parallel Trendline Channel, price stalled under the upper boundary in mid-September, reversed, then broke convincingly under the rising lower trendline under 1,170.

After a throwback, price impulsed lower and reversed definitively off the 1,100 key support.

So, for short-term traders, be keenly aware of the two main potential outcomes from the dominant price pattern currently developing:

Either price continues to trade within the pattern toward 1,390 to 1,400 (bullish short-term), or else we see a stall/failure (bearish) which targets the lower rising line or even beneath it with a “history repeats” situation like that of 2011.

Related: S&P 500 Index (INDEXSP:.INX), SPDR S&P 500 ETF (NYSEARCA:SPY), ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU), ProShares Short S&P 500 (NYSEARCA:SH), ProShares UltraShort S&P 500 (NYSEARCA:SDS).

Written By Corey Rosenbloom, CMT From Afraid To Trade

My name is Corey Rosenbloom, CMT (Chartered Market Technician)  trader, educator, analyst, and I am excited to share with you my  experiences studying and trading the markets and to hear from you  regarding your experiences, challenges, and frustrations, and successes.  My goal is to create a community dedicated to reaching out to those who  have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep  us from achieving our highest potential.

NYSE:SDS, NYSE:SH, NYSE:SPXU, NYSE:SPY