Nailing chart patterns as they develop is akin to sawing naked ladies in half without drawing blood.  The market will always have the last word (you may remember the supposed head and shoulders which developed in the Dow from May to July, which everybody and his dog identified) and if the identification sucks you into a bad trade the last word will be “Gotcha!!”

With that caveat salute this flag in the Dow.  (Irony.)  Looks like a flag.  Waves like a flag….quacks like a duck.  Any way you slice it today’s action reinforced the suspicion that it is a flag.  Albeit a very brief one.  Whether it is a flag or not is not the point.  That only concerns its predictive value.  If it is a flag then we have a minimum of another 500 or so points down to go.  That would put us at more or less 9700.

We are not even going to speculate on the probabilities of that’s happening.  We always (what, always?, well, nearly always as the Penzance Pirates would say) concentrate on the here and now, and the here and now inclined us to hedge silver today and the Qs and the Dow.  We were already considerably lightened up, and we are not net short, but the near term momentum looks like more down.

Some wave facts.  This long wave started 7/10/09 at 8093.31 and terminated 1/19/2010 at 10729.88 after 2642.57 points and a gain of 32.68%.  The present downwave is now 674.88 and 6.29% down.  As we can see, if the flag prognosis were correct we would have a corrective wave of around (m/l) 50%.  There is no guarantee that would be the wave low.  And there is no guarantee that the market will not take off like a rocket up tomorrow.

But, as Damon Runyon remarked, that is not the way to bet.

We hedged silver with ZSL, gold with GLL, the Dow with DXD, the Qs with QID, and the S&P with SPXU.