Option Investor
Trader's Corner

Waving a Flag

Printer friendly version

Upside targets suggested by Bull Flag patterns

Last week, I wrote a bit about one chart pattern that was suggesting not only some further upside potential ahead, but also Index price targets based on a 'measuring' implications of a 'flag' formation. The Index I used as an example, the S&P 500 (SPX), has so far not turned out to be the one surging ahead however.

The surging ahead honor goes to the Nasdaq 100 (NDX), which has been quite strong lately, outperforming the S&P. As it seems unlikely that the S&P 100 (OEX) won't follow at some point, I'll speculate on what would be the upside objectives IF the OEX, the Dow (INDU) and even the quite far behind Russell 2000 (RUT) were to break out to the upside as NDX has done. INDU just managed today a bullish upside breakout and close just slightly above the high end of its recent sideways consolidation.


A sharp run up (suggesting a 'flagpole'), that is followed by backing and filling in a relatively narrow price range represented by an upper and lower dotted line drawn across these highs and lows, creates a sideways or downward sloping formation looking much like the outline of a flag as seen below. This type bull 'flag' formation often represents a consolidation before a next up leg.

There is a price objective or a measuring implication WHEN the upper end of the flag is pierced (the 'breakout' point) within a few days: a second leg up often ends up equaling the height of the first advance (the 'flagpole') as measured from the upside breakout point. The chart picture presented by the Nasdaq 100 (NDX) below illustrates (1) the rally potential implied by a 'bull flag' pattern once prices pierced the upper end of the outlined flag and (2) the further upside potential (to 2128) by the second rally at least equaling the first. The thick light blue line (X) is the flagpole. The doted lines enclose the sideways consolidation that followed, the so-called flag.

Adding the distance carried by the first advance (the flagpole) to the upper end of the sideways flag, given the move above it, is suggested by the dotted line ('Y') ending around 2128. This pattern suggests that the advance of X may at least equal the projected subsequent advance of Y. Stay tuned on whether there is at least that much rally potential ahead in NDX! So far so good; imagine tech leading the market higher again.

To complete the possibilities of flag patterns, a BEAR flag and the opposite of a bull flag, starts with a sharp decline followed by a sideways move of a few days at most and having a narrow price range, which is then followed by a second decline that carries to new lows and winds up falling (at least) the distance carried by the first downswing.

Following the same bull flag pattern outlines below EXCEPT that the lower line was cut through by yesterday's low, making the 'flag' a bit irregular, that low nevertheless feels like part of a bullish consolidation as support was found precisely at the prior (13696) high; resistance once broken 'becoming' support later on. Today's strength in the Dow 30 (INDU) created a high and especially a Close that has pierced the upper end of the recent flag consolidation.

If we add the distance of the flagpole (X) to today's breakout point (the upper end of the flag), a new potential up leg ('Y') would extend to 14322 and becomes a possible rally objective. Of course, the big IF is whether INDU can achieve a new all-time high by piercing its 14022 July top. I think the potential is there for that based on the bullish chart pattern we're seeing.


What if the S&P 100 (OEX) followed the lead of the Nas 100 and achieved a decisive upside penetration above the top end of ITS flag pattern, currently intersecting around today's high at 716? Such action could then suggest upside potential implied by the bull flag pattern to 744. Of course possibly tough resistance implied by the prior 720 high has to be overcome, but substantial OEX upside potential above that is a possibility suggested by the chart.

The laggard Russell 2000 (RUT) has potential on a bullish breakout above 810, at the upper end of the downward sloping flag consolidation, to rally to and through the 835 resistance I project beyond 820 and then to go on and challenge its 856 high based on the bull flag projection. A big stay-tuned on this possibility! Well, the small to mid cap RUT stocks used to be a favorite investment theme!!

Please send any technical and Index-related questions for my answer or feedback to Click here to email Leigh Stevens support@optioninvestor.com with my name ('Leigh Stevens') in the Subject line.


Trader's Corner Archives