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Today we're going to go back to the basics of looking at technical analysis on a flag pattern. Let's take a look at the bullish and the bearish case scenario.
This pattern is a continuation pattern, which means you're continuing into the direction that you left from or came from.
The Case With a Basic Flag Pattern and The Bullish Case Scenario
When it comes to the flag pattern, think of it as a digestion pattern. That's why it's a continuation. It pauses digests and then continues moving forward into that same direction.
If you look at just the movement that we have in the bullish case scenario, we are going from lower prices. Then what happens is these prices eventually stall out. What happens then is it goes a little bit sideways to a retracement.
It creates somewhat of a retracement pattern here for a short bit of time. Here you're consolidating in this little range. And then eventually this will break back out and move into higher prices.
Your flag is right here. It's that pullback segment. The angle could be a little bit different. That means that when we look at the previous trend with flag patterns, the previous trend is always moving in the direction that it's following through.
If you are moving to the upside you get a flag pattern then you'll continue moving to the upside.
The Case With a Basic Flag Pattern and The Bearish Case Scenario
If you're in a bearish case scenario (let's say you're moving to the downside), it will retrace it goes back to that side. This is that retracement, and then they'll continue heading lower.
Look at the volume - bullish case.
If we look at the volume, we have high volume in the initial breakout. And then you'll have lighter volume when you're distributing or moving sideways.
Usually, this is the case. Then eventually you'll get some higher heavier volume moving back to the upside. That's what you're looking for when it comes to volume is you want an increase in volume in the direction that the stock is moving in. They usually go hand-in-hand.
Take a Closer Look at Projections
If I take my hand and we moved about a hand span from the initial breakout to the top of this flag pattern. That's what you'll probably get as well from that breakout point to the top.
Maybe your target area somewhere up high over there. That's usually a projection. But keep in mind if you're looking at bullish patterns sometimes they could continue moving for much longer creating new digestion patterns.
And then again moving into further higher prices. As far as the pattern is concerned that's the projection is from the initial breakout to the top of the flag. You'll probably get that next leg again to the upside. Sometimes it'll be a little bit less because this pattern gets so far extended with the amount of energy and movement.
That's because this is a much shorter compression (much shorter retracement). And if it had a longer retracement, you could move much longer to the upside. But it may not be as quick.
What About Entry Points?
If we're looking at entry points, you'll want to do it right after we break out of the flag pattern. If you miss the flag pattern of course initially, it'd be nice to get in the way at earlier prices.
But that doesn't always work out. In some specific situations if you get a pullback in that flag pattern and you move higher to bounce off of the support or resistance you could go and make an entry point over there. That could be another variation.
Useful Tips You Might Use Right Now
Here're one or two little tips before we go into a bit of detail on the bearish side.This pattern can also move even more sideways. If we move sideways, it can go sideways, and that could work the same for the bear case scenario as well.
That means if we're moving to the bear case you're moving sideways and then further lower prices. That could also be a sideways looking flag pattern. Just keep that in mind that it doesn't necessarily have to retract or pull back at this angle. It may be a little more sideways as well.
It's just digesting the move that was created that was very quick. If we're looking at the bearish case you'll want heavier volume as that stock is selling off. That's where the stock is moving the quickest. Then you'll get a little bit of light volume as we're digesting and again heavier volume on the next leg down.
The entry point will be right where that stock breaks that supporting flag pattern. Sometimes it'll retrace and bounce up and then go down. And that could also be an entry point as well.
That's the flag pattern as far as the basics are concerned. Keep in mind sometimes if they're moving a little more sideways and you think of them like a flag pattern it could be a double top. It could be a double bottom. It's just distribution.
All this is a pausing pattern to the next stage. And that's why when you're looking to get into the stock you want to wait until it breaks out of that pattern. If you miss the initial move, could you do it a little bit earlier and get into the stock and the position earlier? Yeah, absolutely.
You could do that, but then you're risking for it to continue moving in a downward direction if you're looking at a bullish case scenario. Or in a bearish case if you're looking for to short stock and it continues moving higher and reverses, and this becomes a double bottom in a way then it could hurt you and damage you as well. Overall that's the flag pattern and what you're looking for getting in and out of that position.
Real-life Example That Help Can Help You
Welcome to the screen and hear what I'd like to do is show you an example of a flag pattern. This could almost be a pennant pattern as well. Take a look at this GoPro example as we look at the chart the GoPro IPO got released right here.
This was our early initial point. It had a double top right at this point. And then as that stock continued to climb up, you can see we accelerated very quickly with quite a bit of volume. Here's where our flag pattern takes place right here, and if you look there it is it's flagging a little bit.
During that flag pattern, we do have a little decrease in volume. And then, as soon as we break out of that flag pattern, you have an increase in volume. Your entry point would be just right above that flag pattern. You can almost wait until even the top of that flag pattern is cleared to get into the stock.
And you can see you had a nice run a little bit forward into higher prices with this example. Take a look at the next example. Here's another one with Tesla as a little bit of a flag pattern. Again, take a look. We had a run up here in prices, the stock pulled back here slightly and retracement. Then again a nice pop at higher prices was breaking out of that flag.
You can see volumes slowly starting to build. Overall it was just beginning to develop, so it's a little less obvious there on the volume with Tesla. But there was that bit slight small consolidation flag pattern that occurred. And during the breakout, we did have a little more volume.
That's a basic flag pattern example. I hope you found this video helpful. Thanks for joining me and be sure to get on the newsletter list so that way you get notified as I release new videos when we have new books and course that get published.