Last week we observed that SPY and SPX are in the middle of a perfect bear flag, and cautioned to keep a close eye on 1140 and 1185, as areas of support and resistance. Both targets were hit, and the break below 1185 suggested that the lower flag line will come into play again.

This week we continue monitoring the bear flag for signs of strength or weakness:

Given the oversold nature of market internals, and the vicinity of flag support, the expectation once again is for a rebound within a day or two.

We know that the index will eventually break downward (more likely) or upward from the flag, and that is likely to occur from either oversold or overbought conditions. However, betting consistently on markets becoming even more oversold from already oversold levels is a low odds play, since market crashes don't occur that often. Therefore, keep that possibility in mind but also keep in check the urge to bet the house on it. Position sizing and money management are far more important than guessing what the market is going to do next.

In fact, one of the many unique features of our upcoming app is an original position sizing calculator coupled with a risk/reward indicator.