So-called bull and bear 'flag' patterns are often predictive for the next up or down swing in a stock index or stock.
The 'magic' number so to speak for Thursday 1/31/13 is 13900 in the Dow 30 (INDU) Industrials as such a monthly Close (or higher) would be a 'final' Dow Theory confirmation of a primary Bull Market.
BULL and BEAR 'FLAG' PATTERNS:
A so-called bull or bear 'flag' pattern occurs when there is a 1-2 day spurt higher or lower (the daily price range is 2-3 times what came before), followed by a narrow range consolidation. The spurt higher or lower is called the bull or bear 'flagpole' and the subsequent narrow-range consolidation can be seen as taking the form of a subsequent 'flag'.
While the 'bear flag' highlighted below in the S&P 500 (SPX) is a bit 'irregular' in shape, it has the characteristics of a flag pattern in that:
A decisive downside penetration BELOW the low end of a suggested bear flag suggests another downswing at least equal to the first downswing (constituting the 'flagpole'). When you see a downward sloping bear flag pattern you can assume that there will be another decline to follow.
Conversely, a decisive upside penetration of the TOP end of the so-called 'flag' formation of a bull flag pattern, suggests a further move that is at least equal to the height of the initial or prior spurt higher; i.e., the bullish 'flagpole'.
Conversely, even though seemingly improbable, a bull flag pattern is assumed to suggest that another up leg is coming such as in the most recent bull flag example traced out by SPX. See my highlights below.
Contrary to many expectations, especially technically oriented traders who figured that SPX was up against some implied resistance, the most recent advance in SPX into today's highs has now matched the 'minimum' upside objective implied by the earlier bull flag pattern.
Quite neat in terms of the well-known bull flag pattern where an upside penetration of the high end of the flag pattern suggests further upside will follow and the SPX today equaled a 'measured' move for a minimum next upswing and that's just what happened.
DOW THEORY UPDATE:
Don't be confused about the 2/1/13 date of this last chart as weekly charts always take the date of when would be the Close of the week.
Off a bottom like seen in early-2009, a weekly Closing high in BOTH the Dow Industrials (INDU) and the Dow Transports (TRAN) suggests that the Market has reversed into a new primary up trend according to Dow Theory.
As long as new Closing weekly and monthly highs are seen in both Averages, the primary trend is considered to be up and in this manner the two Averages 'confirm' each other. A new high in INDU not matched by a new weekly and monthly Closing highs in TRAN is suspect or better, such a new market peak is not confirmed.
The final all-clear bull market confirmation so to speak is when ALL prior highs in both Averages are exceeded. Thursday, which is the close of the month, could see a new all-time high in the Industrials. Charles Dow in his original writings used MONTHLY Closes as the key test of what was and wasn't a new Closing high; OR, new Closing low in the case of 'confirmation' of a continuing Bear Market.
Dow Theory aspects and weekly and especially monthly charts are relevant to investors mostly but most traders are both.
STAY TUNED ON A NEW CLOSING MONTHLY HIGH!
GOOD TRADING SUCCESS!