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Bullish Patterns
Symmetrical Triangles
Ascending Triangles
Rectangles
Pennants
Flags
Wedges
Head & Shoulder Bottom
Cup & Handle
Trendlines

Neutral Patterns
Symmetrical Triangles
Rectangles

Bearish Patterns
Symmetrical Triangles
Descending Triangles
Rectangles
Pennants
Flags
Wedges
Head & Shoulder Top
Trendlines

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Flags

Bullish flags are small continuation patterns that represent brief pauses within an already existing uptrend. They appear flat or trade with a slight downward slant and typically occur in the middle of a large rally or immediately after a stock has broken out of a basing period.

The slight short-term downtrend against the overall uptrend is very healthy as it functions to scare off weak and emotional long positions that would otherwise slow the movement after the breakout. These longs would sell at the first sign of strength. But instead, as the stock slowly trends down, these weak stockholders sell their positions. Once enough have sold, the overhead resistance in essence is cleared and the stock can continue its ride up.

Whether a bullish flag pattern appears during a large rally or after breaking out of a consolidation period, the expected price movement upon breakout is approximately equal to the preceding move into the flag.

It is important to emphasize that for a bullish flag to truly posses great potential, it must have been preceded by a significant move on heavy volume. Like pennants, bullish flags tend to be symmetrical in that the stock movement after the breakout often mirrors the move into the pattern.




AZO formed a textbook bullish flag pattern in 2001. The stock was in a steady uptrend when it popped up on strong volume. It then traded into a 3+ week bullish flag on lighter volume before busting out on a huge volume surge. This is the exact sequence of events you want with a bullish flag pattern.



BYD is an example of a stock that broke out of a large basing period and then needed to rest in a bullish flag before continuing its move up. In this situation you would use the move into the pattern to measure the expected move out of the pattern, but the massive volume that accompanied the breakout tells you there are a lot of buyers, and you can expect to get a bigger move.



CREAF is another example of a stock that broke out of large basing period, moved up and traded into a bullish flag, and then busted out again. The move into the pattern (from approx. 4 to 8.5) predicted a move to 12.5 when the stock broke out at 8. Not bad, but price targets are only guidelines and should never be blindly adhered to. Sometimes stocks come up short while other times they blow right through them.



This is not what we would consider an easy trade. Certainly the chart posted here look easy and obvious to play, but notice how the stock basically giggled in place for a few weeks before busting out. It took a high volume gap up to break out of the pattern, and only an active and patient trader would have gotten in the trade.

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