January 7, 2007

This week's free newsletter takes a detailed look at one of our favorite trading setups: The Bull Flag Chart Pattern.

We trade a lot of continuation patterns here at TheStockBandit.com, and we do that for several reasons.  The biggest reason is that it's easier!  Almost anyone can look at a chart and see the overall trend, so from there we just locate the next low-risk area to jump on so that we can catch the next wave (a piece of the trend).  Why make trading any tougher than it needs to be?!

One of the chart patterns we trade the most is the bull flag pattern.  Appropriately named for the resemblance of a flag on a pole, the bull flag is an upside continuation pattern found within an uptrend.  It's marked by a sharp advance on high volume (this creates the pole), followed by a period of rest and consolidation on diminishing volume.  This consolidation area fits within two parallel trend lines, and generally slants downward, creating the appearance of a flag.

Chart patterns are all about price, but price is driven by psychology and emotion.  All of our trades are based on chart patterns for this reason, because it's the decisions of buyers and sellers (the market) which cause prices to move.  The stronger the emotion, the more powerful the move in price.

The bull flag pattern certainly involves some emotion.  The sharp advance on high volume is ample evidence that buyers are going crazy to get into the stock.  They chase it higher, producing a big percentage move in a short amount of time, which creates the spike up on the chart that resembles a flagpole.  After the initial pop, they pause to catch their breath.  The sharp move up brings hope to would-be sellers, so they wait to sell and price holds up well as a result of their absence.  Also, the would-be buyers stand aside to wait and see what happens, and this creates a temporary lull in the action with no upside, usually for a few days.  That's how the flag is created.  Once everyone sees that price isn't coming back down, they start buying again and another move up begins - CONTINUATION!

Free Trade Idea:

Here's an example of a bull flag pattern which is set to move.  In fact, earlier tonight we listed this stock as a potential trade for our members.  The stock is ASIA, and it has a textbook bull flag pattern.  The trend is up, the stock popped big on high volume, and has since pulled back slightly to create the flag.  This is the lull in the action, but any day now this stock could perk back up and get on the move.  We're going to buy ASIA if and when it clears the upper trend line of the flag area at $8.00, with a stop loss at $7.60.  Once the trade fires off, we'll be raising our stops to lock in gains along the way.  Here's the chart:

TCNet chart courtesy of Worden Brothers, Inc.

Of course, not every bull flag pattern works out as it should, but we've found this pattern to be a reliable setup.  We also love the well-defined entry and exit signals which this pattern provides.  With the bull flag, we tend to risk a little to make a lot, so we trade a lot of these and tend to do well with them.

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Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

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