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The Bullish Flag

The bullish flag is another common pattern found in stocks. Just like the pennant, this pattern is formed after a sharp upward move. The formation of this pattern represents a pause before the stock resumes the uptrend.

The bullish flag and bullish pennant are some of the most reliable continuation patterns.

bullish flag 1

The above picture shows how this pattern looks like. Notice that there is a sharp upward move before the pattern is formed. The pattern is formed by having lower highs and lower lows. This pattern looks like the bullish pennant.

However, there is a slight difference between these two patterns. The flag looks like a parallelogram or a rectangle with two parallel trendlines. These trendlines slope against the prevailing trend.

Usually, the flag and pennant are treated together. Therefore, the criterias are almost the same.

Criterias

  1. There must be a sharp upward move before the pattern is formed.
  2. There must be a prior existing trend.
  3. This pattern has two trendlines that are parallel, forming a rectangle.
  4. This pattern usually lasts no longer than 3 weeks. Some might take up to 12 weeks. However, the ideal ones should be less than 3 weeks.
  5. Volume should dry up while the pattern is forming.
  6. The pattern is completed when it penetrates the upper trendline.
  7. Stock volume should increase when it breaks the trendline. As with all breakouts, an increase in volume when it breaks the trendline signifies credibility and continuation of the trend.
  8. To measure the target, add the height of the flagpole to the breakout point. The flagpole is the distance between the original breakout point to the top of the pattern.

Additional tips for the bullish pennant and bullish flags

These additional tips are based on Thomas Bulkowski's observation. Bulkowski's book 'Getting Started in Chart Patterns' and 'The Encyclopedia of Chart Patterns' are an excellent read to have a deeper understanding of chart patterns.

  • Pennants are more reliable than flags. The average rise of a pennant after a breakout is longer than the one from a flag.
  • Tight flags and pennants are better than loose ones.
  • Be careful of overhead resistance. If there is a strong resistance zone above, the pattern might not work out that well.
  • Prices move up more in tall patterns than short ones.
  • Pennants with heavy breakout volume with volume above the 30 day average perform better than breakouts with volume below its 30 day average. ( 30% versus 20% average rise after breakout). Flags shows only a slightly better perfornmance, 18% versus 16%.
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