Trading Bull and Bear Flags


Bullish flag formations are found in stocks with strong uptrends. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of consolidation. The flag can be a horizontal rectangle, but is also often angled down away from the prevailing trend. Another variant is called a bullish pennant, in which the consolidation takes the form of a symmetrical triangle. The shape of the flag is not as important as the underlying psychology behind the pattern. Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares. they can get. The breakout from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants. Bull flags have been rare over the last few months of 2008, but they have been beginning to surface in conjunction with the recent market rally.

Answers Corp. (ANSW) is a nice example of a bull flag that may be breaking out. While the flag isn't a perfect rectangle, what's more important is the basic premise behind the overall pattern. Note the strong rise in the stock in mid December as it forms the flag pole, and the tight consolidation that follows. Bulls are not waiting for better prices and are buying every chance they get. The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. This would yield a target price in ANSW of around $9.50.

ANSW_010509
Source: StockCharts.cm

America Service Group Inc. (Nasdaq:ASGR) is an example of a rectangular bull flag. Also notice the long lower tails on the candles showing clear buying every time it dips under $10. Volume has also started to pick up over the past two sessions. A common characteristic for bull flags is the typical volume pattern. Usually, there is a surge in volume as the stock builds the flag pole. Volume then drops off precipitously as the stock consolidates. The breakout from the bull flag often sees another increase in volume, although volume may not increase dramatically.

ASGR_010509
Source: StockCharts.com

HIGH TIGHT FLAGS

Cantel Medical Corp. (NYSE:CMN) is a
high tight flag pattern. What makes this pattern unique is its propensity to make greater than average gains after it clears the top of the pattern. This type of pattern ranks #1 out of 23 patterns studied by Thomas Bulkowski, in his book Encyclopedia of Chart Patterns. He studied over 250 charts of this type and documented their statistical probabilities neatly in a an easy to follow format.

High Tight Flags generally increase on average 69% from the top of the flag after a breakout.

What is unique is the initial run from 7.50, where the stock rises 90-100% in less than 60 days. Most stocks that fall into this category usually have a new product or service that smart investors know about. Note the accumulation in CMN during the building of the pole from the hammer low to the top of the flag (+100%). We have a scan for this rare stock pattern.

You can follow us on our Blog at
http://www.theclosingprint.com/CV_Blog where we typically update HTF pattern scans once or twice a week.

The top of the flag was clearly defined near the $15 area and CMN was able to close above that level. While CMN could enter another parabolic rise, often a stock will come back to test the breakout area a few sessions later, offering a second entry. There are many options for protecting this type of trade
icon1 with a stop loss. Longer term traders often set their stops below the entire flag, and other traders employ tighter stops such as a low under the last candle as a stop. 14.00 (+/-) in this case.

CMN_010509
Source: StockCharts.com

ICF International Inc. (Nasdaq:ICFI) is a great example of a really tight flag, but has not the volume or the increase in share price of a High Tight Flag.

Often, the tighter flags performicon1 best, and they also offer easier stop-loss levels. Bull flags usually resolve one way or the other in less than three weeks. Over longer periods, the pattern becomes a rectangle or triangle. As shown in the figure below, ICFI is moving above the resistance area near $24.50 after consolidating for 10 days. This follows the typical pattern and suggests that this stock could be on its way higher.

ICFI_010509
Source: StockCharts.com


High Tight Flags are a favorite pattern for obvious reasons, if you ever traded one. Below is a recent example in June 2014. Amaya Gaming. After our entry at 11.00 (via a buy stop order) the stock went on to more than double again in less than 2 weeks.
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About Cousin Vinny
Cousin Vinny is the internet pseudonym for TLLeBlanc, Architect who started trading in 1987. Practicing Architecture for over 30 years, Mr. LeBlanc found the technical aspects of building, design and construction prepared him well for fundamental and technical analysis.

He is a family man, a native of New Orleans, currently residing in New Jersey.
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Knowledge is power and with trading, being able to act quickly, with forethought is a critical component to success.

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