Flag Pattern after an Uptrend

A flag is a continuation pattern that in an upward trend consists of a rise in prices, called the flagpole, followed by a retracement channel that usually trends downward, but can be horizontal or upward sloping, and has parallel support and resistance lines that contain the price action of the retracement channel. As a continuation pattern, after a sharp uptrend, prices usually should breakout above the resistance line of the retracement channel and head higher.

Flag Pattern after a Downtrend

A flag in a downtrend is the opposite. Prices fall, followed by a short retracement channel higher and then an expected breakdown below support of that channel.

Flag Pattern Uptrend Statistics

To be more precise, the flag pattern's preceding uptrend should be 45 degrees rather than straight up for best results; the retracement after the trend should be in the opposite direction for best results (Kirkpatrick & Dahlquist, 2010, p. 330).

Flag Pattern Downtrend Statistics

On average, a flag in an uptrend has an average gain of 23%; whereas a flag in a downtrend has an average decline of 16% (Bulkowski , 2005). The flag pattern should occur within a few weeks, 15 days being the optimum, historically; typically, volume on the pattern starts high and declines 80% of the time (Kirkpatrick & Dahlquist, 2010, p. 330).

Traits that Increase the Effectiveness of the Flag Pattern

Traits that increase the effectiveness of the flag pattern include (Bulkowski , 2005):

• Flags in an uptrend are best when they occur in the top third of the 52-week price range. Flags in a downtrend perform best in the bottom third of the 52-week price range.
• "Tight" flags are preferable to "Loose" flags. Loose flags are usually wider, have white space where there is separation between price bar highs and the upper resistance channel and the price bar lows and the lower support channel.
• Flag price retracements should go counter to the trend. If the flag retracement slopes in the direction of the trend, then performance suffers.

Flag Price Target

A classic chart technician price target for the flag pattern "is calculated by taking the distance from the beginning of the sharp trend, not necessarily the beginning of the entire trend, to the first reversal in the pattern and adding it to the breakout price." Bulkowski (2008), in his chart research, suggests the following more precise price target calculations:

Flag in an Uptrend Chart Example

The chart above of Intel (INTC) illustrates a flag in an uptrend. Prices rise from the bottom and enter a channel made up of two parallel support and resistance lines. Once prices reach the upper resistance line, prices gap up slightly breaking overhead resistance and continuing the prior uptrend. Notice that using the flagpole height plus breakout price would have worked well in this chart example; the flag pattern ended up occurring at the midpoint of the uptrend.

Flag in a Downtrend Chart Example

After a short-term steep fall, the 20+ Year Treasury Bond ETF (TLT) enters a period of consolidation creating a flag pattern. Once prices break below the support line of the flag pattern, prices begin to plummet once again.

High and Tight Flag

A high and tight flag is a very specialized form of the flag or pennant pattern and according to Bulkowski (2005) it ranks as his top performing chart pattern.

Average TimeSpan and Percentage Moves of High and Tight Flag

The main differences of the high and tight flag are that the pattern occurs only in an uptrend, the flagpole gain must be greater than 90%, and that the buy signal is triggered when prices break beyond the high of the flagpole as opposed to breaking above the downward sloping resistance trendline of the price retracement/consolidation channel (Bulkowski, 2005). Also, the price projection formula is different – take half the height of the flagpole and add it to the breakout price (Bulkowski, 2008).

High and Tight Flag Average Max Gain

High and Tight flags that occur after a rise of 90% or more have a negligible (almost zero) failure rate and on average, gains are 69% (Kirkpatrick & Dahlquist, 2010, p. 330).

Traits that improve High and Tight Flag Performance

The main traits of the high and tight flag pattern that increase its already profitable record include (Bulkowski, 2005):

• The flag retracement channel from highest high to lowest low should be less than 36%
• The pattern performs better when the flag retracement channel occurs in less than 15 days
• Better performance when there is a three to six month downtrend before the beginning of the flagpole
• Flags that are tighter (smaller high-low ranges) perform better than ragged, unpredictable, wide ranged flag retracement channels.

High and Tight Flag Chart Example

A high and tight flag pattern is illustrated on the chart above of Sears Holding Corp (SHLD). The beginning of the flagpole actually occurs at the end of a downtrend. The flagpole from the base to the peak was 90% over 18 days; notice that the price rise was continually up with no real retracements or periods of consolidation. From the peak of the flagpole, the low of the 25% retracement occurred 6 days later; notice that the retracement (high to low bars) were quite short/tight. The breakout occurred 13 days later when prices closed above the flagpole's peak price. From the breakout price, 29 days later, prices gained 56%.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
4. The Pattern Site. (2005). Bulkowski's Flags . Retrieved June 1, 2012, from http://thepatternsite.com/flags.html
5. The Pattern Site. (2005). Bulkowski's High and Tight Flags . Retrieved June 1, 2012, from http://thepatternsite.com/htf.html