A flag pattern is another familiar chart formation. It is depicted on the charts by a small rectangle or a channel that occurs after a very sharp rally or a pole pattern. Flags are typically shorter-term continuation patterns that signal a consolidation before the resumption of the previous move.
A flag chart pattern typically forms when the market consolidates in a narrow range after an explosive short-term rally. A breakout above the flag signals the continuation of the prior trend.
Flag patterns offer one of the highest risk-reward ratios of trading patterns and in the shortest timeframes. It also has one of the most predictable patterns and is the favorite of trading-type accounts.
Like any other technical pattern, the flag formation needs to be accompanied by other technical indicators, volume analysis, and technical disciplines.
A classic bullish flag pattern can be rewarding as it allows a trader to participate in another explosive move soon after a consolidation. The height of the initial sharp rally or the flagpole is often added to the breakout level to arrive at a projected target.
Flags often occur near all-time highs. Gap ups tend to develop ahead of flag breakouts. However, it can also develop near market lows or during downtrends.
Interestingly, flag patterns are developing across market indexes, including the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), Nasdaq Composite Index (COMPQ), Nasdaq 100 Index (NDX), S&P 400 Mid-cap Index (MID), S&P 600 Small-cap Index (SML), and iShares Microcap ETF (IWC).
Do the short-term bullish flag breakout patterns negate the 6–8-month downtrend channels in the above indexes?
Are the flag breakouts oversold rallies within primary downtrends?
Enclosed are key resistances that confirm the bullish flag pattern breakouts and the projected near-term targets.
S&P 500 Index (SPX – 4,160.68)
A breakout above 4,177.51 suggests +367.19 points or a target at 4,544.70
Dow Jones Industrial Average (INDU – 33,180.14)
A breakout above 33,584.76 suggests +2,949 points or a target at 36,533.76
NYSE Composite Index (NYA – 16,019.56)
A breakout above 15,960.77 suggests +1,175.57 points or a target at 17,136.34
Nasdaq Composite Index (COMPQ – (12,175.23)
A breakout above 12,320.18 suggests +1,284.49 points or a target at 13,604.61
Nasdaq 100 Index (NDX – 12,711.68)
A breakout above 12,897.63 suggests +1,405.34 points or a target at 14,302.97
S&P 400 Midcap Index (MID – 2,567.72)
A breakout above 2,550.18 suggests +219.92 points or a target at 2,770.10
S&P 600 Small-cap Index (SML – 1,265.26)
A breakout above 1,255.26 suggests +108.20 points or a target at 1,3673.46
iShares Micro-cap ETF (IWC – 118.82)
A breakout above 117.21 suggests +10.02 points or a target at 127.23