These tech stocks have seen bullish ‘flag patterns’ recently, says Katie Stockton
As we honor those who served in the military this Memorial Day, it seems appropriate to focus on the bullish flag pattern. Flag patterns are a byproduct of positive momentum and tend to appear in environments characterized by steep upmoves like the current one. A flag pattern is essentially a sideways consolidation phase following a sharp rally, as shown on the chart of privacy coin Zcash. The first close outside of the consolidation phase is the trigger to take a position. On daily charts, flag breakouts have bullish short-term implications that can persist for days or weeks. Flag breakouts tend to foster additional upside momentum, often resulting in an advance that mirrors the “flagpole.” Ideally, the breakouts are supported by above-average volume. The April-May breakout by Zcash shows why it is important to act quickly when taking a position. We have found that some stocks are especially prone to flag patterns, often in the technology sector. Dell Technologies , for one, has seen a series of flag breakouts as it has trended higher. Its consolidation phases have repeatedly refreshed the uptrend, suggesting that traders should welcome periods of digestion after steep rallies. It is easiest to find examples of flag patterns among semiconductor stocks, which have been a primary source of upside leadership. The latest flag breakout by Arm Holdings is a good example of how explosive the resulting rallies can be, having achieved a measured move in just three days. A measured move projection is derived from the “flagpole”, projected higher from the low point of the consolidation pattern. A search for new flag breakouts in the semiconductor sector brings us to Lam Research , which emerged from a digestion phase late last week. If it is indeed a flag pattern, LRCX should advance in the very near-term in a manner similar to the April 29-May 6 rally, which resulted in a steep 23% gain. Flags are continuation patterns that tend to have the best outcomes within strong uptrends. Of course, top-down influences contribute to their success rate. While the current environment has been conducive to flag patterns, that could change quickly, so we would pay attention if flag breakouts stop working. —Katie Stockton with Will Tamplin Access research from Fairlead Strategies for free here . DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. 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