Massive Monthly Enhanced Bear Flag Example on GE
08/21/2009 10:44 am EST
General Electric (GE) gives us a great example of how the patterns in technical analysis (charting) are fractal and are applicable to all time frames. Let's take a look at perhaps the most massive bear flag I have seen, which serves as an ideal educational example of the "enhanced flag" concept.
Starting with the late-2000 price highs, GE formed a large "impulse" (or “pole”) down from the $60 level to $20, which ended as the broad market bottomed in 2002/2003.
GE then formed the "flag" portion of the pattern through the entirety of the recovery into the market's 2007 highs (notice that GE was only able to recover 50% of its 2000 price peak) before breaking down in 2008 as price traveled down to complete the measured move anticipated by the huge "bear flag" pattern.
This also could be considered an ideal measured move pattern, more commonly known as "AB = CD," which is almost identical to the “flag” labeling.
In terms of the enhanced flags, I enjoy describing the "best" bear flags as having an "ABC" three-wave structure as it pulls into either the 50.0% or the 61.8% Fibonacci price retracement. In this case, we saw the three large wave "ABC" pullback right into the 50% zone.
To better increase the confidence, we would look for candle patterns to form at the expected resistance level, and we saw a doji (it's hard to see on this chart), which is an indecision/reversal candle often seen at key inflection points in a market.
Aggressive traders can enter at the upper range of the parallel trend line, which allows for a tighter stop, while more conservative traders can wait for a confirmed breakdown of the lower trend line, which confirms the flag is most likely the dominant pattern. The target would be a full measured move of the initial impulse.
Keep studying this pattern for additional insights and realize that the majority of technical analysis is fractal, meaning the pattern you see here on the monthly chart is just as applicable when it appears on the daily, weekly, or even hourly/intraday charts.
By Corey Rosenbloom of AfraidToTrade.com