A Flag is a Short-Term Pattern that forms over a few days or weeks, especially after an earnings announcement. It can either be bullish or bearish. However, Flag Patterns are usually viewed as continuation patterns or a slight pause in the current trend. So, anytime there is a binary event you can see that the Flag being established prior to it. The rallies are referred to as ‘Flag Poles’, and usually occur after a binary event such as earnings.
A Flag Pattern occurs due to the event of an initial strong Short-Term price movement followed by a sideways price movement, parallel Support and Resistance Lines as shown in the Chart. The red line is the Overhead Resistance and the green line is the Support and there is decrease in Volume.
In Figure 43A, the stock rallies to the upside starting March 29th and going into April 12th. Then you see the buyers taking the profit off the table. When the buyers take the profits off the table, especially before the earnings announcement, you will see the pole of the Flag. You can see how the red and green lines are parallel starting from April 12th to April 19th. The Entry is a breakout against direction of previous trend. So, you can see a breakout of Overhead Resistance on April 26th-this is your entry point and it has happened on an increased Volume.
As mentioned, Flags are also continuation patterns. On July 6th and July 7th you can see the violent move to the outside after the Short-Term consolidation phase, and you have a continuation of the upward momentum. So, your entry point is right around $34-34.25. You know that there is an earnings announcement coming up, and hence the buyers are taking the profits off the table and this pattern continues into the next earning cycle.
Be aware of the dominant trend in the market, even if you are not looking to trade in the same direction. And Price Patterns can give you a glimpse of what a Stock’s future may be because investors tend to react to price movements in a fairly predictable manner. If you learn to distinguish the Patterns that are forming before the next major profit move, you can take part in some extreme profitable trades. Price Patterns are not infallible – so you have to make sure not to rely on them entirely and should instead also look at Systematic Analysis like the ones provided by Tradespoon. If you take that information and overlay that with Chart Patterns, it will improve the odds in your favor.