A Tale Of Two Flags

11/02/04 11:27:53 AM

by Arthur Hill

A large falling flag on the weekly chart and flat flag on the daily chart point to further upside for the Information Technology SPDR (XLK).

Security: XLK
Position: Buy

Flags are continuation patterns that are resolved with a breakout in the direction of the previous move. They are consolidations that represent a rest in the prevailing trend. Bullish flags usually slope down as mild corrections and bearish flags usually slope upward as buying pressure remains weak. A downward sloping flag after a strong advance is a bullish pattern and traders are advised to heed a breakout.

On the weekly chart, the Information Technology SPDR (XLK) sports its second falling flag since the October 2002 low. The first falling flag formed from December 2002 to March 2003 and the breakout started the large advance of 2003.

Figure 1: The two flags

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The second falling flag extends from January 2004 to October 2004 and looks more like a long consolidation. The stock broke above the upper trendline in late October and the upside projection is to around 26.5. Flags are said to fly at half-mast, and this projection represents a move similar to the prior advance.

There is even a smaller flag on the daily chart. XLK moved from 17.86 to 20.03 and then consolidated most of October. This flat flag represents a trading range to digest the August to October run. The recent break above 20.03 signals a continuation high, affirming the current uptrend.

With two flag breakouts in progress, the prospects for further upside are quite good. However, patterns don't always work as they should, and it is a good idea to set a pattern negation point. Should the index move below the October lows (19.30) and the trendline extending up from 17.86, these flags would be negated and the bears would take over.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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A Tale Of Two Flags

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