Section 5:

Bullish Continuation Patterns

 

Bullish Flag

 

Definition:

A bullish flag forms in the context of a bullish trend. Like the name implies, the pattern appears as a flag, complete with a flagpole. The flagpole of the pattern is formed when a stock stages a sharp upward move in a short period of time.

The flag of a bullish flag can unfold in one of two ways. First, the flag can be defined by very precise horizontal support and resistance levels. This variation of the pattern reveals strong opinions on the parts of buyers and sellers. Second, the bullish flag might format with downward sloping support and resistance levels. This second variation is the most common.

Nuance:

Bullish flags are typically short-term in nature and are quite common within the context of strong bullish trends. In fact, bullish flag after bullish flag will form during strong bullish trends. They may form and play out in a matter of days or weeks. Rarely will a flag form over the course of years.

Application:

A bullish flag is confirmed once the stock closes above the upper-end of the flag, whether the flag is horizontal or downward sloping. A stock might break above horizontal or diagonal resistance and retest the level several times, using it as support. This price action is consistent with that of most bullish continuation patterns such as the bullish wedge.

A bullish flag is rejected if the stock breaks down below support, either horizontal or downward sloping. The stock will typically languish if it violates its bullish flag.

Figure 5.3

Example:

The two variations of bullish flags are shown in Figure 5.3 in the United States Oil Fund (USO), which is an exchange traded fund that tracks the price of crude oil. Notice how two of the bullish flags are slanted, with downward sloping support and resistance levels. The flag in the middle is horizontal, with well-defined support and resistance levels.

This example illustrates how bullish flags can repeatedly form within a bullish trend. It also shows the different time periods over which flags can form, from relatively longer periods to incredibly short periods. The third flag in the USO formed in a matter of days, yet it led to an explosive move higher.