Traders let’s talk about the flag pattern on IBM. The flag is important to be able to spot because it is usually the sign of a continuation pattern after a break out. We first covered IBM about a week ago in a previous blog “setting alerts 101”. Now let’s talk about how to manage and analyze the trade once were in it. In the chart to follow I will show you how to use multiple technical analysis of candle sticks (opening/closing price of the stock), moving averages and volume to determine the health of the trend and manage the trade.
So let’s start with the definition of a flag pattern. From investopedia.com “a flag pattern is a technical charting pattern that looks like a flag. Flags result from price fluctuations within a narrow range and mark a consolidation period before the previous move resumes”.
The break out day as noted on the chart was the start of the “flag pole” like the one you see in someone’s front yard flying an American Flag. Following the break out was roughly 6 days of consolidation (trading in a tight range i.e. equal numbers of buyers and sellers) as noted in purple. The consolidation period is what creates the flag which you can see now that we have fine tuned your technical eye.
The flag is known for being a continuation pattern because a stock normally consolidates at a higher price showing both buyers and sellers agree that the stock is priced accordingly with respect to the market until new buying pressure sends the stock in this case higher, completing the continuation pattern of the initial uptrend.
I also wanted to point out a few things with respect to the uptrend. Notice how the stock’s candle sticks (daily opening and closing prices) bounces off of the blue 10 day moving average as it trends higher. Volume, always a great confirming indicator, shows above average (on the flag pole) break out day, during the consolidation period pretty average volume as equal numbers of sellers and buyers agree on the price level, and then volume confirms the continuation of the uptrend as we get an above average volume reading on the upward break out from the consolidation area thus allowing you to confidently believe this uptrend is strong and here to stay, at least for now until the charts tell us something different. As always keep a tight stop.