Bull Flag (Bullish Continuation)
Introduction | Main Characteristics | Example |
Flags are amongst the most commonly appearing continuation patterns. A flag is similar to a pennant and represents a brief pause in a vigorous trend. When these patterns occur, they typically do so exactly in the middle of a rising or declining trend and, as such, are said to "fly at half-mast".
The formation of a Flag typically takes 1-12 weeks, although most chartists prefer formation over a period of 1-4 weeks, and not much longer. The parallel trend lines that comprise a flag tend to slant away from the prevailing trend and the pattern as a whole appears in the shape of a parallelogram or rectangle.
Legitimate flags are always continuation patterns and only rarely does a pattern that resembles a flag instigate a trend reversal. In order to avoid the pitfalls of wrongly picking a pattern as a flag, one must adhere to the guideline that a sharp move into the pattern is essential to its legitimacy. A lethargic preceding move would suggest that the pattern is not to be recognized as a flag.
Flags form during rising trends (Bull Flags) as well as during declining trends (Bear Flags). The action that precedes a bull flag is typically characterized by a sharp and virtually vertical upwards move that is often accompanied by heavy trading action. The near-vertical price move into the flag pattern is referred to as its flagpole.
The occurrence of the flag is depictive of a period within which the trend is "catching its breath" and building vigor for the next phase. Trading activity witnessed during development of a flag is usually characterized by tepidness, that is until the pattern is complete.
In the case of the bull flag, a breakout above the upper flag line completes the pattern and triggers the continuation of the rally. This breakout typically comes with a rash of activity as price soars towards its target.
The measurement of the target for a flag is rather straight-forward. The trader measures the length of the flagpole - the distance from the point at which the rally into the flag began up to the high point of the flag - and projects that distance from the breakout point to arrive at a target. The target is usually accomplished fairly quickly.
LVS was in a minor downtrend in Sep '06, when price hit bottom (at 64.5) and started to shoot upwards on high volume. The stock rallied from 64.5 to 78.5, gaining nearly 25% in just over 3 weeks. Then, price hit minor resistance and proceeded to trade within a small, downward slanting channel.
This counter-trend move retraced approximately 50% of the preceding rally, over a 3-week period into early-Nov. Investor participation was low during this phase, indicating a reluctance on their part to get too aggressive in either direction.
That was just the calm before the storm, however, and trading volume virtually erupted when price suddenly blasted through the upper line of what was now seen as a completed bull flag. The buying pressure that caused the breakout - and thereby a resumption of the rising trend - was so severe as to have caused price to gap up above the resistance line (at 74.7) and not look back until the target was met barely over a week later.
This target - 88.7 - was calculated by measuring the length of the flagpole (78.5-64.5 = 14 pts) and projecting that distance from the level of the breakout (74.7).
