Bull Flag
Definition
A bull flag is a continuation pattern where a stock pauses in a tight, slightly downward channel after a sharp move higher — it's called a flag because on a chart it looks like a flag mounted on a pole.
Example
“After the catalyst drove it from $8 to $12, the stock pulled back slowly to $11.20 on light volume. That tight flag broke out at $11.50 and ran another $2 before lunch.”
Detailed Explanation
The flagpole is the sharp initial move — usually news-driven, earnings-driven, or catalyst-driven. The flag itself is the consolidation phase, and what you're watching for is the right kind of consolidation: tight range, decreasing volume, slow drift rather than aggressive selling. This tells you that early buyers are simply sitting on gains and the sellers don't have enough conviction to push price much lower. The supply side is drying up.
Volume is the critical confirmation signal. Volume should drop significantly during the flag formation. When volume contracts and then suddenly expands on a breakout above the flag's upper trendline, you have a high-quality setup. If volume stays elevated during the flag itself — meaning the stock is actively being distributed — the pattern is weaker and more prone to failure. The best bull flags look almost sleepy before the breakout.
The measured move target is the length of the flagpole added to the breakout point. So if the initial move was $4 and price breaks out from $11.50, the target is around $15.50. In practice, many traders take partial profits at 50% of the measured move and let the rest run with a trailing stop. Bull flags fail most often when the broad market turns south during the flag formation, or when the catalyst turns out to be weaker than initially perceived.