A High Tight Flag For LNC

12/17/08 09:20:00 AM

by Arthur Hill

After a sharp advance with big volume, Lincoln National formed a high and tight flag that acts as a consolidation before a continuation higher.

Security: LNC
Position: Accumulate

Figure 1 shows Lincoln National (LNC) over the last three to four months, with the stock losing around 80% from the September high to the November low. There was a high-volume washout in late November as the stock declined on big volume. This capitulation, or selling climax, marked the bottom as LNC moved higher over the next few weeks.

FIGURE 1: LNC, DAILY. The stock lost around 80% from the September 2008 high to the November 2008 low.

Graphic provided by: TeleChart2007.

After this selling climax, the stock advanced four days straight with volume that was well above average. Such strong buying interest solidified the low. More important, there was another high-volume surge in early December and two more last week. Combined, these strong upside volume days pushed on-balance volume (OBV) to a new high in mid-December. Volume precedes price and a new high in OBV argues for further gains in the stock.

Figure 2 focuses on the high and tight flag. After a sharp surge from late November to early December, the stock became overbought and ripe for a consolidation or pullback. The stock consolidated the last six days with a very tight range. In addition, note that the flag slopes down, which is typical for a bull flag. A breakout would signal a continuation higher and target further strength toward the mid-20s.

FIGURE 2: LNC, DAILY. After a sharp surge from late November to early December, the stock became overbought and ripe for a consolidation or pullback.

Graphic provided by: TeleChart2007.

The flag target is based on a flag flying at half-mast. The green dotted lines represent the flagpole with the flag in the middle. A continuation advance equal to the November–December surge would target a move to around 26. Failure to hold the breakout and a move below the flag low would negate a bullish signal.

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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