Wednesday, March 3, 2010

Bull Flag Screen Update

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.

(image has been lost) <-- Notice the bull flag before it broke out. THis is when gold 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.

update: Because my example image of gold in 2006 is gone, I decided to add a bit of information. WeeklyTA explains the bullflag in his post Common Breakout Patterns.

Bull flags are usually very small and can last for only one day or several weeks. The way to tell the entry is by using the appropriate moving averages. Sometimes, I like to enter a flag regardless for fear that I may miss the breakout. However, the closer the pattern is to the 15- or 20-day, the faster the breakout will materialize.

The book Encyclopedia of Chart Patterns by Bulkowski provides some information about bull flags that you can't find elsewhere.
As you can see 55% reach the target price in a bear market, while 64% of bull flags meet their target in a bull market. Obviously it pays more to invest in a bull market as the average rise is greater as well.
Perhaps more important than identifying bull flags is knowing how to trade them. The best flags are the tall ones, there's even a special pattern for bull flags called "high and tight bull flags" which is talked about in IBD founder William O'Neil's book How To Make Money In Stocks. Bulkowski also mentions information about high and tight flags. This information is already shared at stocktradinginvestments with the following posts on high and tight flags.

High And Tight Flag Trading System Introduction - This trading system examines the use of high and tight flags and talks about identifying them.

Flag Trading System Part 1/3 - Now that the basics of the trading system are explained this goes into the process of actually using the system.

Flag Trading System Part 2 - The series continues explaining how and when to buy and sell and how to use stops and trailing stops, limit sell orders, and more.

high tight flags - This shows a brief example of how the flag trading system will identify stocks.

It appears that Flag Trading System Part 3 has not yet been developed, but I'm eager to learn more about the series as it should conclude

High And Tight Flag results - Additional information by Bulkowski himself showing you the research results on his high and tight flag case study.

As you can see clearly a high and tight bull flag is superior to a regular bull flag, so keep that in mind when looking for bull flags.

If you trade bull flags it's a good idea to set a stop just below the recent consolidation low or if you really want to be picky you can set it at the breakout point that you buy it, and if it crosses below, you can either buy it again when it crosses above the buypoint again or else move onto another bull flag.

Bull flags are more powerful when they have strong earning surprises behind them such as those featured at Zacks.

If you combine good strong earnings, strong earnings growth and fundamentals, earning surprises with recently strong price action followed by a consolodation and a breakout again, you will be able to get a stock that has the potential to have big gains. Of course past results aren't always an indication of future results, so use caution when trading bull flags or high and tight flags, or any stocks for that matter.

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