Since plunging two weeks ago, many financial markets have been treading water as market participants digest the recent developments and try to determine what comes next. From a technical analysis perspective, pennant patterns or flag patterns (both are considered to be continuation patterns) may be forming in a variety of different financial markets. These patterns often happen after a major move as traders take a pause to catch their breath. A strong breakout with high volume in the direction of the original trend is necessary to confirm the end of the pennant pattern and the resumption of the primary trend.
The bellwether S&P 500 may be forming a pennant pattern:
The 10 Year note price may also be forming a pennant pattern. Its decline (which corresponds with higher bond yields) has been contributing to the stock market’s bearish action lately. If the possible pennant pattern is confirmed to the downside, it would be another bearish omen for stocks (and vice versa).
The VIX or Volatility Index (a fear gauge for the U.S. stock market) may also be forming a pennant pattern. If the VIX breaks out to the upside, it would give a bearish signal for stocks (and vice versa).
Please be aware that this commentary is not a prediction. These patterns need to be confirmed one way or another by a breakout with strong volume. If the stock indices break to the downside, it would be extremely concerning after the bearish action that occurred in early-October.