Perfect Flag Example

Oct 31, 2007: 6:37 PM CST

The Chicago Mercantile Exchange (CME) stock recently carved out a near-perfect technical analysis ‘flag’ pattern formation that can be used as an example for further study.

Remember, a flag is proceeded by a sharp price and momentum impulse, consolidates for (usually) less than two weeks, and then ejects upwards in a ‘measured move’ that allows proper (or possible) price projection.

The “pole” of the flag serves as a measuring rule when price ejects from the flag. The best flags will be contained (price will find support) at a rising 20 period moving average.

Let’s look at the perfection of the recent CME action:

The test of the rising 20 period MA served also as an “Impulse Buy” trade due to the new momentum high preceding it. This is common of observed flag formations.

The initial flag pole began around $540 and terminated around $620, carving out an $80 price move. The breakout from the flag at $620 could have allowed for a price projection $620 + $80 = $700.

Price reached its recent high around $695, but the projections were based on rough calculations and fell $5 shy of the projected target (still an amazing and impressive run).
Had you calculated the projection from the bottom of the flag – at $610 (at the moving average), then the objective was met and exceeded by $5. Either way, a $70 – $80 potential target that was achieved in 5 days is nothing less than absolutely stellar.

Flags are often easy to perceive on a chart and are relatively easy to trade. Study them further if you aren’t quite sure what they are or how to trade them.

1 Comment

One Response to “Perfect Flag Example”

  1. WilliamGCash Says:

    Yeah, I love bullish flags. You did a great job of explaining them – and the chart of CME is just beautiful.