Chapter 12
Flags
Some of the patterns in this book can become established for the long term, spanning years or even decades. The flag pattern is nothing of the sort. It is, instead, a fleeting, short-term pattern, typically lasting just a few weeks, and it is a continuation pattern, allowing a security to take a breath before moving in its dominant direction.
DEFINITION OF THE PATTERN
The first requirement for a flag pattern is that it be preceded by a strong move in the first place. That move can be up or down, but it must be strong and sharp, since the entire basis for a flag pattern is that it represents a brief pause in the action of an overall powerful move. Even though prices may form flag patterns in the midst of markets that are meandering, the fact that they aren't in the context of a strong move negates their import.
Next, the flag should be countertrend to the general trend. Because of its countertrend nature, the flag should be downward-sloping for a bullish move and upward-sloping for a bearish move. After all, the buying or selling action is supposed to abate during the formation of the flag—often on dwindling volume—and it makes sense that the dominant direction would be opposed while the flag is being formed.
The flag itself is defined as a group of prices that are cleanly bounded by a pair of parallel trendlines. If the lines are converging, the pattern is a pennant, which is covered in a different section. The flag itself shouldn't be terribly lengthy; a length ...
