CHARTING Flags and pennants

Press, 18 December 1985, Page 42

CHARTING Flags and pennants

This is the fourth in a series of articles on charting by GEORGE PRICE, futures broker with Egden, Wignail and Company, Christchurch.

The flag is probably one of the most dynamic and reliable of all charting patterns. It occurs fairly frequently in both bull and bear markets and, since it portends fast and decisive moves, the reader would do well to memorise this article.

Making money in the share market and futures market is hard at the best of times, but if ever there is a time where an investor or trader is down to his or her last buck, this is the pattern worth waiting for, to risk it on. You are unlikely to find this formation at the start of a major trend, in fact in the great majority of cases it will appear after the primary trend has already been under way for some time. Hence it fits the criterion on our continuing study of secondary tops. Let us take a close look at our silver chart and do an indepth analysis on this chart pattern. The move will mostly start after the market has been moving in a sideways manner for a while. Trading volume during this period will give no clues as to the next move. In fact, during the period before the breakaway volumed tend to be dull. On the start of the breakaway, or flag pole, volume will increase markedly as when silver fell from $14.50 to $14.10.

Volume will continue to accelerate as panic selling sets in and the price plunges vertically. Silver hit $12.80 two days later. This vertical, or straight line move down, is called the flag pole. The market now moves into a consolidation phase, as it digests the over sold market conditions. This results in the flag formation. Take a look at the chart and you will see how the formation gets its name.

As the flag starts to form volume will start drying up until it is down to virtually nothing. Please remember this; it is terribly important. There must be a drastic fall in volume and no mistake about it. This flag will usually take no more than four to seven trading days to form. If volume does not fall with the formation of the flag, or if it takes longer than seven days in the making, the formation should be

viewed with suspicion. If the flag follows our rules, you would be justified in risking your last buck and taking a position on the third day of the flag formation. Breakout moves from these chart patterns, when completed normally are among the fastest and most profitable forms of market action.

The big bonus is that the flag also gives you a remarkably accurate prediction as to its likely fall. The technician’s adage that the flag flies at half-mast means that price measurement objective from a breakout of the flag is the length of the pole that E recedes the flag. Again, ave a look at the chart and the whole story will have unfolded.

You may be wondering what happened to the pennant. The pennant is only

another chartist’s name for the flag. It may be shaped slightly differently, with the flag tending to be more symmetrical.

Since the flag is such a superb trader’s pattern, here are a few tips worth remembering:

1. Always take profits a few points before the target implication and stand aside from the market. 2. If the flag appeared after the bear market in a share or commodity has been in progress for a long while it can also be a warning that the bear market is now in its final stages. (This tip is rather more difficult to interpret.)

fake this case in silver. Having reached a high of $5O in January, 1980, it is still in a bear market nearly six years later. The current price is $5.80.