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These flag patterns are extremely important to be able to identify on the fly, as you’re looking at different charts. I would go through a number of different charts, to take a look and see if you can actually establish these types of flag patterns, and you can tell when they are continuation patterns, or when they are going to possibly fail like this.
Realize that they will fail occasionally, like they did in this pattern, but you still had higher lows here, on this pattern. There is a high probability that this pattern of higher trends and higher prices will continue.
There is lots of material out there that you can read, in addition to what I’ve just told you, about continuation patterns. There are so many different patterns that you can actually look at charts and try to determine. There are triangles, there are wide-range bar technical analysis patterns. There are about a billion patterns. There are rectangles and all kinds of patterns that people have tried to establish over the years, as being more predictive of prices and continuation movements than others.
The flags work really well for me. They make psychological sense, too. When prices are dramatically higher in a single day, like this, it makes sense that prices are going to consolidate over a few days, for people who got in early on this up-trend here to begin taking profits – and others, who are looking to establish long positions, but others come into the market.
There are some psychological pinnings, for the reasons that these flag formations do form. All I know is that they work pretty well, over the course of any indice. If you’re trying to establish any type of position in any stock or ETF, they seem to show up in just about every chart that you look at.
In fact, I’ve gotten so used to using the Dow Jones Industrial Average, or the SMP 500, in conjunction with the VIX, I would never trade without it. I would never establish any kind of position in an index or an ETF without taking a look at both the VIX and the index itself, in this way. By looking at flags, by looking at support and resistance points. It has just become second nature to me.
I hope it does for you. It will become a habit for you, if you begin to look at chart patterns. Take a look at a number of different chart patterns, and begin to draw these flags and support and resistance points. I think it’s going to dramatically improve your confidence, and your ability to enter into high-probability trades in the future.
Let’s continue, with something along a different line. I’ve showed you the technical analysis that I do on indexes and stocks, by identifying flag patterns as well as support and resistance points. Another interesting thing about the stock market is that it will fixate itself, at some time, upon news events. That fixation will continue for a long period of time, sometimes. I’m talking about weeks or months per year.
It is cyclical, though. For example, back during this time of the stock market decline back here, the news was reacting, and the market was reacting, to news about the credit crisis. About the mortgage crisis, and loans that were going bad in the mortgage industry. A number of financial institutions that were holding these mortgages could not price them. There was a great deal of news about the credit crunch, and the credit crisis that was happening in the United States. It affected some parts of Europe and the U.K., as well.
Every time a news item came out that was negative, about the credit crisis, in this time period, the market reacted negatively. It would go down on the news. If you can anticipate what the news is going to say about particular events, you can get a head start in inputting that news, or that correlation of the news, into the pricing of the index that you’re looking at. This is especially true for the Dow Jones Industrial Average or the SMP 500, or something like that.
If you start to see that there is some sort of correlation between prices in the market and a particular news item, perk up your ears a little bit, because that is going to be the key phrase or the key word for probably several weeks or months, even. Anytime something negative happens in the credit crunch, or in these mortgages that were written with no money down, and any of these other under-writing tactics that people and brokers had used during the late 1990s and early 2006…
Now they are coming out with news that many of these mortgages have gone bad. People aren’t repaying the mortgages anymore. The market reacted to negative news on that. It was beginning to develop a correlation to that news item. The market would go down, just based on the negative news that would come out about that item.
Lately, these down-turns in the market, in June of 2008 – if you’re watching these videos in the future, the correlation is going to be completely different. If you catch the news and understand that the market reacts to the news, you can be able to plug this into the technical analysis system of support and resistance and flags, that I have already given you.
At this time in history, oil prices have gone up dramatically, from about $70 a barrel last August, to about $135 a barrel. That’s high or low, depending on what time frame you are listening to this. My point is that when oil started going up, there was a correlation with the stock market to oil.
When oil started going up, the stock market would go down on that. At least, that was the justification for it going down. Whether that’s actually true or not, I have no idea. The market does tend to fixate on a particular news item for quite a while.
In this case, the market fell pretty dramatically here. It was about 250 points on this day. This was May 7. At that time, oil had gone up. They used the fact that oil had gone up for the market’s decline. It was the beginning of a fixation on oil prices at this time, and a correlation to stock prices.
Again, the market rallied up when oil backed up a little bit. Oil went up again, and the market sold off. Oil started to recede from those $135 levels, down to about $122, and that is the same time that the market started creeping up here, in this flag pattern. Of course, oil began to increase again.
Today, the market is currently down 274 points, on the news that oil had gone up $7.50 per barrel