The bull flag is a chart pattern found in stocks in a strong uptrend. It is called a bull flag because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a tight, rectangular, sideways consolidation. The flag can be a horizontal rectangle, but is also often angled down away from the prevailing trend as price drifts lower. Another variant is called a bullish pennant, in which the consolidation takes the form of a symmetrical triangle. Flags are often continuation patterns and the majority of the time a flag resolves in the same direction as the trend preceding the flag. Recently, I have seen some bull flag patterns developing in oil drilling stocks and, more importantly, in oil itself. (For background reading, check out A Guide To Investing In Oil Markets.)

In Pictures: Top 7 Technical Analysis Tools

If we look at oil as represented by the United States Oil Fund (NYSE:USO) ETF, we can see a bull flag developing near $38. While USO has traded in a very choppy range over the past several months, it has been steadily grinding out higher highs and higher lows. In November, USO rallied to near $38 before plummeting to just under $35. This looked like a breakout reversal at first, but USO quickly recovered and made new highs. It is now flagging near this level and refusing to give up much ground. If USO can clear this flag it could provide a boost for oil stocks. (For more, see Analyzing Chart Patterns: Flags And Pennants.)


Cenovus Energy (NYSE:CVE) is an individual oil driller that is flagging after an important breakout. CVE had been struggling with the $30 level for several months before finally clearing it in November. While it retraced a portion of the breakout, it has held above prior resistance near $30 and is attempting to consolidate. While the pattern is not a classic bull flag, it is following much of the psychology behind the pattern. Traders should watch to see if CVE attempts to resume its breakout after this consolidation. (For more, see The Anatomy Of Trading Breakouts.)


Penn West Energy Trust Ordinary (NYSE:PWE ) is another drilling stock that is in the midst of flagging after an important move higher. PWE surged in the fall with a move from under $18 to near $24 per share. It has been consolidating this gain for several weeks and is forming a large, flag-like consolidation. PWE may have a little more consolidation ahead of it, but traders should watch the boundaries of the channel it is trading in for a possible trading opportunity.


Legacy Reserves LP (Nasdaq:LGCY ) is an example of a stock trading in more of an ascending triangle than a flag pattern; however, the psychology behind the pattern is much the same. LGCY had a nice rally heading into the consolidation pattern and is now taking a rest break as the stock digests the recent action. The area just above $27 has been acting as resistance and traders need to monitor this level moving forward. If LGCY can clear this level it could continue higher. (For more, see Oil And Gas Industry Primer.)


Bottom Line
While not all of these stocks are trading in picture-perfect flag patterns, they all are consolidating after a recent rally. With their main catalyst of oil also trading in a flag pattern, it's possible these stocks could continue to move higher soon. Traders should monitor the flag developing in USO and be ready to pounce on oil stocks if it can clear its current flag. If oil continues higher, other stocks in this sector may follow suit. (For more, see Technical Analysis: Introduction.)

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Professionals

    Are ETFs a Good Fit for 401(k) Plans?

    The popularity of ETFs among investors and advisors continues to grow. But are they a good fit for 401(k) plans?
  2. Mutual Funds & ETFs

    The Top Vanguard Emerging Market ETF

    Learn why growth investors should consider investing in VWO's portfolio of emerging market stocks.
  3. Investing Basics

    How to Pick the Best Muni Bonds and Muni Bond ETFs

    Municipal bonds are a good addition to a diversified portfolio as long as you choose correctly based on population and local economic trends.
  4. Chart Advisor

    Stocks at Important Technical Levels

    These stocks are breaking or holding at key support and resistance levels. How they react here impacts the direction of the price over the coming months.
  5. Mutual Funds & ETFs

    Top 3 Emerging Markets Bond Mutual Funds

    Discover detailed analysis of the top three mutual funds offering exposure to the emerging markets bonds, and learn about the suitability of these funds.
  6. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  7. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  8. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  9. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  10. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!