Bullish Flags and Pennant Formations

Bull market flags and pennants occur in an extended intermediate- or long-term advance. Here, a definitive uptrend is in place, which is evidenced by higher valleys (higher lows) across time. This indicates accumulation in which demand continually gobbles up supply offered by sellers. These advances can grow tired. Institutional buyers wonder how much of their own activity is pushing up the stock. Retail investors see the stock as extended and no longer want to chase it, whereas others have been waiting for the momentum to slow to take profits. These sentiments lead to a slight pause in buying activities, which, in turn, leads to an interruption in the accumulation pattern.

Bull Flag

The bull market flag formation might be identified by its appearance of a flag hanging down from the larger advance. Hence, the term bull term flag. The flag formation is a small cluster of daily bars formed by two parallel lines. The lower line is made up of lower lows (falling demand) and the upper line by higher highs (rising supply), which form the two parallel lines making the flag (see Figure 8.12).