Monday, March 3, 2008

Bull Flag Screen

A Bull flag is a chart pattern where after going up fairly rapidly, a stock consolidates and channels back and forth for awhile. Typically stocks that break out of these stock patterns go soaring.
One way to find these type of stocks is:

-Use a stock screener to find stocks that have done well recently. This depeneds on your time frame, but an example would be to take the top 1000 performing stocks in the past 3 months or so. Usually the better performing, the more likely the bull flag breakout will lead to big gains.
-Then of those stocks screen out all of those which aren't within 10% of their 52 wk high.
-From that list you're looking for stocks in a short amount of time that have traded sideways or downward. You might do this by screening out all of those with more than 5% price gain (or even 3% or 2%), in the past 3 weeks and also screen out those that have gone down more than 15% in the top 2 weeks, so you're left with those in the middle Of course, you certainly could do a longer period of time than 3 weeks, just know that you should be biased to the downside at this stage, as bull flags are more likely to flag downward, and doing so is usually pretty healthy.

Now you have your list of stocks.

I like to anaylize the sector from there, only taking the top sectors, and I might even do that before selecting the top 500 in the screen. (for example the top hundred of stocks in oil, metals, and ags, right now might be a good selection).
But regardless, you need to watch this list for breakouts. A stock should break out of the flag. Theerer are two potential buypoints. Buypoint one is just above the trendline of the consolidation channel. The 2nd is just above the 52 week high.

You should picck stocks that you like, that have moved on volume, and that have good earnings, and set stop buy orders at either or both of these buypoints for as many of these patterns as you want....
You should also set a stop below the bottom of the consolidation channel. The tighter the channel, and closer it is to the 52 week high, the better risk/reward because of these stops.

You can have mutiple bull flag screens for different time periods, and perhaps you want those that also have good fundimentals. I like to try to find stocks that are consolidating near there high with earnings comming up as those usually are setting up very nicely, and setting a stop buy order on the breakout can leave very good results.

Notice the bull flag before gold broke out when it was around 500 in early 06. Now golds approaching 1000. Sometimes a stock will flag down, and then meet support at the Moving Average. If it bounces then it will go up and hit the trendline resistance and then bounce down to support again. The support and resistance will squeeze together, and that's when the value of the stock (or commodity) will make it's move.

When to sell?
Generally if you look at a stocks movement BEFORE the consolidation you can take half the gain from the start of the rally until the consolidation period. Add that gain to the bottom of the consolidation, and that's a pretty decent limit sell point. You can take some of your shares and sell them before hand, some at that point, and then some after if you would like.

Stock screen will look like
% price change past 6 months = TOP 1000 AND
52 week high (less than or equal to) 12% AND
% price change past 1 month >-20% AND
% price change past 1 month <3% id=" xxxx" id="yyy" months =" TOP">-20% AND
% price change past 1 month <3%
PEG= Bottom 10
P/S= bottom 3

Adding things like PEG and P/S may lead to bigger gains, and may be better for longer term patterns.

Note: This post has been updated. Find the bull flag screen update here.