The flag is a consolidation pattern that occurs in a strongly trending stock. The name is derived because the pattern resembles a flag on a pole. The pole is the result of a trending move in a stock and the flag results from a tight, rectangular, sideways consolidation. Flags can occur in both up trending (bull) and down trending (bear) stocks. The flag can be a horizontal rectangle, but is also often angled down away from the prevailing trend. The shape of the flag is not as important as the underlying psychology behind the pattern.
The reason a flag forms is that despite the strong preceding move, the stock refuses to give up any ground as it consolidates. Market participants are flocking to the stock and as a result, it trades in a very tight range. Because it is basically pent up energy, the breakout from a flag often results in a powerful move in the direction of the prior trend. (For more, see Analyzing Chart Patterns: Flags And Pennants.)
Recent market conditions have resulted in many stocks forming bull flags as the markets pauses after the strong rebound from its October lows. Under Armour, Inc. (NYSE:UA), for instance, is in the process of forming a flag after breaking out from a several month long consolidation. The $80 level had been acting as stiff resistance until finally giving way a few weeks ago. UA has been trading in a very tight range since the breakout as it drifts back towards the $80 level. This is a flag type consolidation, and any breakout above this pattern could lead to a sharp rally to new all-time highs. (For more, see The Anatomy Of Trading Breakouts.)
Tractor Supply Company (Nasdaq:TSCO) is another stock consolidating in a flag pattern after clearing significant resistance. TSCO cleared a descending trendline that was marking prior rally attempts in mid October. It has been flagging since then, and trading near all-time highs. This is positive behavior in that bulls are refusing to give up much ground, despite the strong rally from the August lows.
While Vera Bradley, Inc. (Nasdaq:VRA) is not quite at new highs, it is flagging after breaching key resistance. The $41 level had been holding VRA back since it broke down in June. However, VRA successfully broke through the level, possibly forming an inverse head and shoulders reversal pattern in the process. VRA has settled into a flag pattern as it consolidates between approximately $45 and $43. Any strength that leads to a breakout from the flag could easily carry VRA to new highs.
Nike, Inc. (NYSE:NKE) is following a similar pattern as well, although the "flag pole" is not quite as strong or well defined as the others. However, NKE is consolidating as it drifts back towards a key breakout area near $92.50. In fact, NKE appears to be rebounding off this level and could be close to a flag breakout.
The Bottom Line
Because most stocks follow the general markets, patterns will often appear in several stocks at the same time. The flags that are appearing across multiple stock charts are clearly revealing a market that is finding willing dip buyers. If the markets continue to press higher, then it will be almost inevitable that these stocks follow through above their flags. While this doesn't guarantee that they will trade to fruition, the conditions continue to remain favorable for further upside.
Charts courtesy of stockcharts.com
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.