Page 153 - THE MARKET WHISPERER

THE MARKET WHISPERER 15 1

In this intraday chart showing two days of trade, we see Philip Morris
rising strongly at the start of trade from $49.7 to $50.5, which is a sharp
rise of some 2% lasting for just fifteen minutes. This is the area that forms
the flagpole. Now it consolidates around the high and completes the bull
flag formation. Note that in this case, we can clearly see over time how
the candles around the consolidation become increasingly shorter, i.e. the
price is consolidating towards a possible breakout. This is the area of the
flag.

Another interesting point is that the stock consolidates beneath the
price of $50.5, which we call a semi-round number. As we will learn later,
at round numbers as well as sometimes semi-round numbers, many sellers
inhibit the stock’s further rise. The stock breaks out of [1] the bull flag’s
head (resistance) and rises a little more than 1% [2] “without looking back.”

Bear Flag

A bear flag is the reverse pattern of the bull flag. The pattern comprises
one or more downward trending candles representing the flagpole, and
several candles (usually three to five) consolidating around the bottom
of the pattern to create the flag shape. A stock will be shorted when the
price drops below the flag’s low. The pattern’s strength derives from the
stock price dropping below the low, but instead of correcting upwards, as
would be expected of a stock that has completed a sharp series of drops,
the stock breaks down under the low. The significance of a new low is an
unequivocal victory of sellers over buyers. Buyers are very pressured, do
not wait for the correction, and are willing to sell at any price. On the other
hand, buyers who prayed for a correction to save them are disappointed
by the stock’s further drop to a lower low, and sell under pressure, which
causes the stock to drop further. The bear flag formation allows us to
short scalp (speedy entry and exit), because the stock price is stretched
downwards even before the breakdown, and we are afraid that the stock
will drop to a new low but then immediately correct itself upwards.