Analyzing Chart Patterns: Bull/Bear Flags and Pennants

Analyzing Chart Patterns: Bull/Bear Flags and Pennants

Bull/Bear flags and Pennants:

Flags and Pennants are considered as continuation patterns. They usually represent a brief pause, sideways consolidation before the previous move resumes. These patterns play out by a sharp advance (bull flag) or decline (bear flag) with heavy volume which marks a midpoint of the move.

  • Flag: A flag is a small rectangle pattern where price moves within a tight range, taking on a shape of a flag. You can think of it as a flag hanging on a pole. Longer and wider flags are considered as channels.
  • Bull flags are continuation patter that can be found within an uptrend market. If a stock was in an uptrend (flag pole), then the bull flag would be formed by two tight parallel down sloping trend lines. We call it a bull flag!  It consists of lower highs and lower lows within the bull flag. The pattern is confirmed on a upward break out of the bull flag.
  • Bear flags are continuation patterns that can be found within a downtrend. If the stock was in a downtrend (flag pole), then the bear flag would  be formed by two tight parallel upward sloping trend lines. We call it a bear flag.  It consists of higher lows and higher highs within the bear flag. The pattern is confirmed on a downward break out of the bear flag.
  • Pennant:A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures. Pennants are typically smaller in size (volatility) and duration.
  • Examples on bullish/bearish flag and pennants:

 

$NKE daily chart below showing bullish flags and pennants

 

$GS  daily chart analysis below showing bull and bear flags

 

  • Targets: There are two targets related to the flag chart figure:  Size of the flag and size of the pole.
  • How to trade them: Flags and pennants can be found in both uptrend and downtrends.   In the case of a bull flag, traders should try to enter at the bottom of the flag or upside breakouts from the flag in an uptrend.  Similarly during the downtrend try to enter at the top of the bear flag or downside breakouts from  the bear flag.  If you try to go short when its forming a bull flag or if you  try to go long when its forming a bear flag or  pennants then you may get caught up in the wrong side of the trade.
  • Flag patterns entry with candles: The confirmation of the Flag comes with the breakout. If you have a bullish flag, you will buy the stock/Forex pair when the price action closes a candle above the upper side. If you have a bearish flag, then you would sell the pair when you see a candle closing below the lower level of the pattern.
  • Flag patterns stop loss: The most logical location to place the stop loss would be beyond the most extreme swing within the Flag structure. So, if you were trading a bullish flag, then your stop should be placed below the lowest bottom in the Flag. Conversely, if you were trading a bearish Flag, then your stop should be placed above the highest top in the Flag.
  • Targets: The length of the flagpole can be applied to the resistance break or support break of the flag/pennant to estimate the advance or decline. Therefore, measure the size of the flag pole, then add that length to the bottom of the flag/pennant for bullish patterns . For bearish patterns, subtract the length of the flag pole from the top of the flag/pennant.
  • Duration: Flags and pennants can be found in any time frames. Flags and pennants are short-term patterns that can last from 1 to 4 weeks.  It also depends on the time frames you are using!  Once a flag lasts more than 12 weeks old then it would not be a valid one. Older pennant can turn into rectangle or a symmetrical triangle.
  • Volume: Volume should be light during flag pole confirmation. However, Volume should also be heavy during the breakout of the Flag or the Pennant.
  • Risk reward: Since flag poles can be quite large, and the size of the flag/pennant quite small, these types of patterns produce favorable risk/reward ratios.