Page 152 - THE MARKET WHISPERER

150 PART 5 - Principles O f Technical Analysis

A bull flag is a bullish pattern comprised of one or more strong candles
that form the “pole” of the flag, and several candles (usually three to five)
that consolidate around the head of the pattern, and comprise the flag
itself. The long entry will be executed when the price goes over the top of
the flag. The pattern’s strength derives from the stock price quickly rising
to its top, but instead of correcting at its peak as would be anticipated of
a stock that has completed a sharp rise, the stock consolidates around
the peak and within a short time breaks out beyond that, continuing to
move up “without looking back.” The significance of rising to a new high
is an unequivocal victory of buyers over sellers. Buyers are not waiting
for a reversal and are willing to buy at any price. On the other hand, the
short sellers, disappointed by the stock’s rise and hoping it will correct
downwards after the high, are forced to close their shorts when the stock
reaches a higher high (i.e. to buy), thus causing further highs.

A bull flag is a strong formation that usually allows us to execute a
scalp. The term “to scalp” relates to a trading method where the trader
executes a speedy entry and exit from a stock. It usually lasts between
several seconds and several minutes. We buy at the breakout, sell three-
quarters of the quantity at the first signal of weakness, and then hold the
remaining piece in the hopes that the final quarter will continue rising.
We scalp quickly, since the stock price prior to the breakout was already
extended upwards and we fear that the breakout will fail.

A Bull Flag Formation for Philip Morris – PM