Bull Flag Formation
There are some chartists who believe that the flag does have to be parallel, but they can take the look of a tight wedge (or pennant) formation at the end of the flagpole. To view the bear flag formation lesson, click here.
Characteristics
Flagpole
The flagpole will usually develop because of an unexpected news such as takeover speculation or favourable company earnings announcements: basically news that will spike the price of a share higher.
Flag
After the price of a stock has risen so quickly and the excitement of the positive news subsides, the flag develops because fewer buyers are willing to pay the high price that was commanded just a few days before, but at the same time, sellers are unwilling to sell below a lower support limit. As the flag develops, the volume will tend to decrease. This is basically a consolidation period.
Breakout
Once the stock breaks out of this formation, the target price is the height of the flagpole. It's important to see the price breakout on higher volume. Essentially, the bull flagpole formation is a break in a larger uptrend, the price might have gotten ahead of itself therefore needs a break, or consolidates before continuing the upward trend
Practical Example
Alumina Ltd (AWC). On the 21st January 2007 AWC triggered after it broke out from a 'Bull Flag Formation'. The initial price target was achieved and the target was upwardly revised based on the emergence of the Bull Flag formation to the green area highlighted, this price ($6.80) was reached on the 24th January.
The graph above clearly highlights the flagpole (aqua area) and the region where the share price is consolidating before breaking out. During the consolidation, the volume started decreasing and increased on the breakout. The target area ($6.80) is clearly indicated by the green circle.
