The term ‘Bull flag’ describes a quick, strong movement on a positive development. Then, this is followed by a few days of lower and sideways price changes but on a weaker volume. After this, a second sharp rally then sends the prices to a new high on a strong volume. By adding the height of the flag pole to the breakout level, you can calculate the technical target.
Flagpole - If you measure from the high of the flag down to the first resistance break, this will be the flagpole. Normally, the flagpole will be formed by a sharp advance and this should then break the resistance level or the trend line. When a line extends up from the break and reaches the high of the flag, this forms the flagpole.
Flag - ‘Flag’ describes the small rectangle that can be seen between trends; for example, the flag would slope downwards if the previous trend was higher. Similarly, the flag would slope upwards if the previous trend was lower. The price action has to be contained between the trend lines because the flags are normally far too short to actually create reaction highs and lows.
Sharp Move - To start with, there has to be some form of evidence of a prior trend if it is to be considered a ‘continuation pattern’. Furthermore, it needs to show a sharp advance and it can normally be seen on higher volume levels. With the flag representing a pause, the move is normally just the first leg of a significant shift.
Break - With a bullish flag, the previous advance is resumed after a break is seen above resistance.
Duration - Whilst flags normally last anywhere between one and twelve weeks, many believe that eight weeks pushes the upper limits of a ‘reliable’ pattern. In a perfect example, the pattern will start to form in the first four weeks. As soon as a flag hits the twelve week point, it is considered a rectangle. For this reason, there is a strong debate as to how reliable the patterns are in the four weeks leading up to this point.
Targets - If you wanted to estimate the decline or advance, the flagpole length can be applied to the resistance break.
Volume - Whilst in the decline or advance phase, the volume should be heavy and this provides a certain legitimacy for any movements that create the flagpole. When the volume on the resistance break expands, the formation becomes somewhat more valid and the likelihood of continuation increases.