Exploring Bull Flags and Bear Flags

Meir Barak |

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Bull FlagA bull flag is a bullish pattern comprised of one or more strong candles that form the “pole” of the flag, and several candles (usually three to five) that consolidate around the head of the pattern, and comprise the flag itself. The long entry will be executed when the price goes over the top of the flag. The pattern’s strength derives from the stock price quickly rising to its top, but instead of correcting at its peak as would be anticipated of a stock that has completed a sharp rise, the stock consolidates around the peak and within a short time breaks out beyond that, continuing to move up “without looking back.”

The significance of rising to a new high is an unequivocal victory of buyers over sellers. Buyers are not waiting for a reversal and are willing to buy at any price. On the other hand, the short sellers, disappointed by the stock’s rise and hoping it will correct downwards after the high, are forced to close their shorts when the stock reaches a higher high (i.e. to buy), thus causing further highs. 

A bull flag is a strong formation that usually allows us to execute a scalp. The term“to scalp” relates to a trading method where the trader executes a speedy entry and exit from a stock. It usually lasts between several seconds and several minutes. We buy at the breakout, sell three quarters of the quantity at the first signal of weakness, and then hold the remaining piece in the hopes that the final quarter will continue rising. We scalp quickly, since the stock price prior to the breakout was already extended upwards and we fear that the breakout will fail.

A Bull Flag Formation for Philip Morris – PM

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PM

In this intraday chart showing two days of trade, we see Philip Morris International Inc. ($PM) rising strongly at the start of trade from $49.7 to $50.5, which is a sharp rise of some two percent lasting for just fifteen minutes. This is the area that forms the flagpole. Now it consolidates around the high and completes the bull flag formation.  Note that in this case, we can clearly see over time how the candles around the consolidation become increasingly shorter, i.e. the price is consolidating towards a possible breakout. This is the area of the flag. 

Another interesting point is that the stock consolidates beneath the price of $50.5, which we call a semi-round number. As we will learn later, at round numbers as well as sometimes semi-round numbers, many buyers inhibit the stock’s further rise. The stock breaks out of [1] the bull flag’s head (resistance) and rises a little more than one percent [2] “without looking back.”

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Bear Flag

A bear flag is the reverse pattern of the bull flag. The pattern comprises one or more downward trending candles representing the flagpole, and several candles (usually three to five) consolidating around the bottom of the pattern to create the flag shape. A stock will be shorted when the price drops below the flag’s low. The pattern’s strength derives from the stock price dropping below the low, but instead of correcting upwards, as would be expected of a stock that has completed a sharp series of drops, the stock breaks down under the low. The significance of a new low is an unequivocal victory of sellers over buyers. Buyers are very pressured, do not wait for the correction, and are willing to sell at any price. On the other hand, buyers who prayed for a correction to save them are disappointed by the stock’s further drop to a lower low, and sell under pressure, which causes the stock to drop further. The bear flag formation allows us to short scalp (speedy entry and exit), because the stock price is stretched downwards even before the breakdown, and we are afraid that the stock will drop to a new low but then immediately correct itself upwards.

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GENZ- Bear Flag

In the above example, the stock price of the biotech company Genzyme  ($GENZ) drops at the start of the day’s trading, and with one five-minute candle forms the bear flagpole [1]. For the next five candles, it solidifies around the intraday low, hinting that despite the price drop, it has no intention of correcting upwards as would normally occur with a sharply dropping stock. Consolidation around the bottom of the flagpole creates the flag itself. Breaking down the base of the flag leads, as expected, to continued lows.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer." 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PM Philip Morris International Inc 88.18 0.41 0.47 3,532,445

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