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Forex Stock Exchange Forum  » Forex and Stock Trading English Forum » Forex School » Bull Flag Patterns (Continuation Pattern)

Bull Flag Patterns (Continuation Pattern)

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Bull flag is a sharp, strong volume rally on a positive fundamental development, several days of sideways to lower price action on much weaker volume followed by a second, sharp rally to new highs on strong volume.
The technical target is derived by adding the height of the flag pole to the eventual breakout level at point (e).
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• Bull flag formations involve two distinct parts, a near vertical, high volume flag pole and a parallel,
low volume consolidation comprised of four points and an upside breakout.
• The actual flag formation of a bull flag pattern must be less than 20 trading sessions in duration.
• Most flag patterns occur at the middle of the larger move higher for a stock.
• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.
If the stock closes below this level (now support) for any reason the pattern becomes invalid.

Bulls flags are favored among technical traders because they almost always lead to large and predicable
price moves. Like all continuation patterns, bull flags represent little more than a brief lull in a larger move
higher. Indeed, in many cases the flag pattern will actually take shape in the middle of the ultimate move
higher. Bull flags occur because stocks rarely move higher in a straight line for an extended period, instead,
the move higher is broken up by brief periods where traders "catch their breath".

The first part of the flag pattern is often called the flagpole or mast. During this phase the stock price
skyrockets to a reaction high (a) on some positive fundamental development. Very often this will be the
unveiling of a new product, a favorable legal resolution or positive earnings surprise but the change in price
is near vertical as would be sellers are overwhelmed by new buyers caught-up in the euphoria of the
moment. As the stock soars speculators that were smart enough to have purchased the stock at lower levels
begin selling.

At this point the second phase or flag portion of the bull flag begins. Because the flow of news and investor sentiment is overwhelming positive, most of the stock sold by speculators is easily absorbed in the
beginning but as time passes fewer investors seem willing to pay the current price. Slowly, the stock price
begins to falter on dramatically reduced volume. The descent is slow because bullish sentiment is still very

After several days of minor weakness, a rally begins and a minor low is set (b). Sensing an opportune time
to enter new positions buyers begin to return, pushing the stock very near the most recent high but because
volume is light this rally is easily rebuffed and a slightly lower high (c) is established before the price turns lower.
The new round of selling sends the stock modestly lower on reduced volume. After several more
sessions the stock moves below the lows made at point (a) but volume contracts further. Just as it begins to
look as though a real decline is underway there is a new positive fundamental development and the stock
begins to move higher (d).
As the rally accelerates volume increases dramatically, buyers overwhelm those taking profits. Over the next 1-2 sessions the stock moves through the high set at point (c) and volume surges further. This triggers an upside breakout point (e).
The next session several Wall Street firms either make new "buy" recommendations or reiterate existing recommendations. The stock opens higher and goes on to make significant new highs in the weeks ahead.

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