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Minyan Mailbag: Maintaining the Gains

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Is this a real pennant formation in the S&P 500?

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Dear Professor Sadana,

I read your buzz of a couple of days ago and attempted to recreate the triangle/pennant formation that you presented. Any comments post 10% upside move?

Thanks,
James



Minyan James,

I have seen several references to the "symmetrical triangle" in the S&P 500 after I talked about the possibility on October 22nd and discussed it further in The Worst Case Scenario.

At the risk of sounding like I'm splitting hairs, it seems more like a pennant than a symmetrical triangle, the primary difference being the time: Pennants are formed in 3 weeks or less. They're usually consolidation formations (unlike symmetrical triangles, which generally have a longer time period and denote indecisive consolidation).

We're at a critical juncture in this pennant formation. It needs to satisfy 3 main criteria for its authenticity:

1. It should occur after a straight move in one direction.

2. The volume inside a pennant formation should markedly diminish.

3. Price should break away in the expected direction (down in this case) in no more than 4 weeks and volume should pick up.

If any of these conditions do not occur, then the pennant is invalidated. In our case, the pennant has only been a possibility, since the third condition above hasn't been fulfilled yet.
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