Perfect Example of Trading a Bull Flag Trade June 25 SPY

Jun 25, 2009: 12:09 PM CST

This morning’s price action gave us an ideal, if not perfect, example of how to trade a “Bull Flag” price pattern.  Let’s take a look at the 5-min SPY and learn how to trade this powerful set-up.

We had an initial price pulse up (that formed off a positive momentum divergence – not shown) which filled a small downside gap.  The price movement was sustained (almost 10 white bars in a row) which came into overhead resistance via the R1 (Resistance 1) Pivot.

Price then formed a 45 degree angle pullback after a new momentum high (notice the angle trendline channel) to the rising 20 EMA.  More importantly for trade execution (and confirmation), price formed a doji candle then a white bar then formed a hammer candle that bounced right off the 20 EMA.  Price broke out of the flag on a strong white (bullish) candle.

Where was the optimal execution?  I would say anywhere within the yellow zone for aggressive traders and just as price broke out of the upper trendline for conservative (need confirmation) traders.  In either case, the stop was to be placed around $90.40 which would have been just beneath the rising 50 EMA (allowing a little bit of ‘wiggle room’).

The target was a pure measured move of the morning’s impulse, which – taken from low to high – equaled roughly $1.30.  I like to add this ‘price projection’ target to the low of the flag which was at $90.55, which gave us a price target of $91.85.

Price formed the intraday high where I labeled the highlighted zone at $91.84 which was your targeted exit not just because of the price projection target (which often forms intraday reversals/retracement), but for the following reasons as well:

Price formed 2 dojis in a row
Price was at the upper range of the Bollinger Bands (not a solo reason to sell)
Price had hit (achieved) the R2 (Resistance 2) Daily Pivot
Price had formed a Momentum Divergence with the 3/10 Oscillator

That is how I approach my trading and how I teach these concepts – nothing in isolation seems to work, but when you combine three or so ‘reasons’ or non-correlated concepts – supported by indicators (but not driven by indicators) that all point in the same direction, you often yield better trading results.

In this case, the risk was roughly $0.20 for a target of $1.30, or a stellar 6 to 1 reward to risk ratio – needless to say, taking high probability, low-risk set-ups like this can yield a consistent edge over time.

Not all trades will be as ‘perfect’ as this, but by understanding “ideal” trades, you put yourself in a better position to take advantage of these opportunities when they occur in real time.

Please join me as the MoneyShow.com rebroadcasts my presentation “Idealized Trade Set-ups for the Intraday Trader” on July 1st at noon EST – I’ll be there on a free live chat to answer questions through the presentation.

Corey Rosenbloom, CMT
Afraid to Trade.com

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10 Comments

10 Responses to “Perfect Example of Trading a Bull Flag Trade June 25 SPY”

  1. Roy Says:

    Very good post.

    A suggestion, please add a printable version of the post.

    It will help the readers to print the important tactics…

    Thanks

  2. Corey Rosenbloom, CMT Says:

    Thanks Roy!

    I'll ask my website creator to get on that! Very good idea.

  3. Chris C. Says:

    Was this lower and upper parts of the bull flag all part of a 3 fractal on the Elliot Wave. If so, is usually the case for a bear or bull flag to be a 3 fractal or is it usually or can it be independent of an Elliot Wave. Thanks.

  4. Corey Rosenbloom, CMT Says:

    Excellent Question Chris.

    I've seen bull flags in both 3rd and 5th waves from time to time, but even when it was forming, I commented to some people “Looks like a 3rd wave – we have TICK making a new high) and sure enough after this post, we got a new price high 5th wave that formed a “Three Push” negative divergence as well as a TICK divergence. Wanted to do a post but decided I could trade it and talk about it at the same time so I chose to trade it – plus I'll just show the pattern after the close because there's no point in posting up a pattern that only a few people will see before it's complete.

    But yes, flags are independent of EW however they can be part of it, which is why I find Elliott very helpful for confirmation. If you get an ABC pullback that results in a flag trade that winds up being a 3rd wave, wait for the 4th to come back into support and play the fifth, using other techniques (candles, moving averages, Fibonacci, etc).

  5. Perfect Intraday Elliott Wave Lessons from SPY June 25 | Afraid to Trade.com Blog Says:

    […] I published a post on the “Perfect Bull Flag Lesson” so take a look at it for additional […]

  6. Roy Says:

    Very good post.

    A suggestion, please add a printable version of the post.

    It will help the readers to print the important tactics…

    Thanks

  7. Corey Rosenbloom, CMT Says:

    Thanks Roy!

    I'll ask my website creator to get on that! Very good idea.

  8. Chris C. Says:

    Was this lower and upper parts of the bull flag all part of a 3 fractal on the Elliot Wave. If so, is usually the case for a bear or bull flag to be a 3 fractal or is it usually or can it be independent of an Elliot Wave. Thanks.

  9. Corey Rosenbloom, CMT Says:

    Excellent Question Chris.

    I've seen bull flags in both 3rd and 5th waves from time to time, but even when it was forming, I commented to some people “Looks like a 3rd wave – we have TICK making a new high) and sure enough after this post, we got a new price high 5th wave that formed a “Three Push” negative divergence as well as a TICK divergence. Wanted to do a post but decided I could trade it and talk about it at the same time so I chose to trade it – plus I'll just show the pattern after the close because there's no point in posting up a pattern that only a few people will see before it's complete.

    But yes, flags are independent of EW however they can be part of it, which is why I find Elliott very helpful for confirmation. If you get an ABC pullback that results in a flag trade that winds up being a 3rd wave, wait for the 4th to come back into support and play the fifth, using other techniques (candles, moving averages, Fibonacci, etc).

  10. Perfect Intraday Elliott Wave Lessons from SPY June 25 Says:

    […] I published a post on the “Perfect Bull Flag Lesson” so take a look at it for additional […]