CHART PATTERNS
Want More Accurate Price Estimates?
Bear Flags
by Markos Katsanos
Here's how you can estimate price targets more accurately in a declining
price trend and more.
MY 2005 articles on flags included statistics
for bullish flags only. Although my research started long before, the publication
of the first article coincided with the worst market correction since 2003,
and I have since received a number of emails from readers questioning the
validity of the profit target formula as far as bearish formations are
concerned.
This motivated me to research flags and pennants in a declining price
trend. Results of the statistical analysis, together with a new formula
for estimating a price target for the optimum exit strategy, will be derived
later in this article.
My research includes observations on 100 bear flag, pennant, or similar
short-term consolidation patterns for the preceding year and a half from
January 2004 up to June 2005. The criterion I used for including a pattern
on the list was a steep and quick price decline leading to the formation.
My observations included:
-
The price level and date of the lowest and highest point on the pole
-
The last point on the flag before prices broke down below the lowest trendline
of the formation, and
-
The lowest price down to the first post-flag short-term bottom.
The volume trend during the formation pattern was also noted. Other observations
included market conditions and historical volatility.
Statistical analysis revealed surprising findings, contradicting some
widely accepted principles. Next, I'll discuss formation characteristics
such as volume and pattern length, and I will derive a more realistic measuring
formula.
FORMATION CHARACTERISTICS
Flags and pennants are quite common and useful for short-term trading,
as the average formation length (not including the flagpole duration) is
only eight trading days with a maximum of no more than 15 trading days
or three calendar weeks.
Bearish flags are characterized by higher tops and higher bottoms bounded
by two parallel trendlines, with the pattern slanting up and against the
prevailing trend (Figure 1). Pennants look similar to short-term symmetrical
triangles, with tops and bottoms bounded by two converging trendlines (Figure
2).
FIGURE 1: FLAG FORMATIONS, eBAY. It is not uncommon
for bear flags to appear in pairs. In this chart, the bear flag in late
March 2005 was preceded by a string. Note the precipitous decline of the
money flow (VFI) in the top window and also the volume decline during both
formations in the bottom window depicted by the volume linear regression
line (in blue). All target and pole numbers refer to the flag and not the
string.
...Continued in the May issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the May 2006 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2006, Technical Analysis, Inc.
Return to May 2006 Contents
