Chris Brecher's Chart Pattern Secrets
Recognizing Bull and Bear Flags is not enough.
Let a pro show you the additional factors needed to increase your success.
With Chris Brecher
Sr. Managing Director of Stocks
My name is
Chris Brecher
Iʼm the Senior Managing Director of Stocks at Simpler
Trading and have been a professional trader for 40 years,
including 8 as a floor trader on the CBOE. This gives me a
unique advantage, as I have seen all kinds of markets how
to adapt to changing market conditions.
“Have 3 reasons to do a trade, but only one to exit a trade.
If the reasons I initiated the trade become absent, then I
exit or at least tighten my stop.”
CBOE
3
MR. FLAG MAN
After the first few years of trading with “feel” on the floor, I started noticing that
flag patterns were starting to preceded huge moves. In the late 1980’s bull
flags would precede many takeovers.
I would try to buy options in takeover rumor
stocks with bull flags. It got to the point that
if I walked into a pit to buy calls, the traders
wouldn’t trade with me.
I had to call in the orders to a floor broker,
to avoid detection. I then shed the previous
nickname (thank goodness!) and became
known as “ the Flag-Man”.
4
Parts to the Class
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Identification of Patterns
Identifying the Overall Trend
Identifying Support and Resistance
A primer on the indicators I use
Fundamental factors to watch
Companion products versus correlated stocks and futures
Timeframes
Initiation
Stocks
Options
Objectives
Determination of risk
Protection
5
The Class Will Be Divided into 5 Major Sections
1.
2.
Basics of Flags & Ledges
a. Theory of flags
b. Flag identification
c. Flags vs. Brecher Ledges
d. Support Identification
e. Sector Identification
Why Overall Trends Are Important
a. Identification of the Overall Trends
b. Indicators
c. Futures identification
d. Fundamentals I use
e. Correlated indexes
3.
Why Time Frames are Important
a. Time Frame for identifying flags
b. Timeframes for trading flags
c. Multiple time frame screen set
4.
Long term or Short Term Flags?
a. Stocks, options or futures?
b. The benefits of both
5.
How to Determine When to Get Into
and Out of Flags / Ledges
a. Initiation
b. Determination of risks
c. Protection
6
How to Get The Most Out of This Class
Take notes and write down your questions!
I would also pay particular attention to the chart
examples I go over that are not on the slides.
I would use this as a reference manual.
Use the slides and the video combined as a
reference manual.
7
How to Get The Most Out of This Class
We will be taking a 5-10 minute
break every 60 to 90 minutes.
On each time frame I’ll mention
the time frame and date as they
can be hard to see. But note that
the time frame does not matter
with this strategy, just the
pattern.
8
Multiple Time Frame Chart
These in general are the 6 timeframes I use. 1m, 2m, 5m, 15m, 1h, 4h. In the last hour
of trading I focus on shorter term charts.
9
What is Our Goal Today?
The goal of this class is to teach you how I use simple chart
patterns to find opportunities using various stock and/or
options strategies.
By the end of this class, my hope is you understand:
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How to find the ‘best’ opportunities in the market and build a trading
watchlist
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How to determine the trend
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Major chart patterns that can be applied for all stocks
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Executing and setting up favorable options strategies
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How to manage trades and stack the odds in your favor for consistent
success, considering both time decay and direction
10
Consolidation Patterns
Bull Flags, Bear Flags, Brecher Ledges
What are consolidation patterns?
Many chart reference manuals say at least 80 percent of
market moves are consolidation patterns.
1.
Consolidation patterns are a time of “rest” after a protracted
move in either direction.
2.
These usually occur after a trend move results in a product
becomes either too overbought or oversold, or has hit support
or resistance.
12
My Theory of Trends
In strong trends, stocks “breathe”.
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They move in waves, with sell-offs very shallow, while
the MACD (or some other oscillator) gets oversold. A
strong stock will hardly sell-off, while the MACD goes
back to zero. These stocks might make bullish
consolidation patterns, and can be measured by a
contraction in volatility.
●
The “squeeze”, wildly popular at Simpler Trading, can be
used to help with scanning for these patterns. I will share
some of my scans later in the class.
13
What are consolidation patterns?
Types of Consolidation Patterns
a.
b.
c.
d.
e.
f.
Bull fags
Bear flags
Brecher ledges
Measuring gaps
Triangles
Rectangles
14
My Favorite Consolidation Patterns are Flags
I have 3 favorite consolidation patterns.
Bull Flags
● Slumbering Bull Flags
Bear Flags
● Slumbering Bear Flags
Brecher Ledges
● Also called flat line trendline bear flags
15
Why My Favorite Patterns are Flags
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With limited resources, a trader has to get the most “bang
for the buck”.
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I have found flags give the most “bang” because, once it
breaks, it is a very good indicator of how far the next move
will be before the trendline reverses itself.
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Flags usually form after rapid moves and resolves itself
quicker.
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Many flags have really narrow ranges, so it is easier for
traders to put in tight stop orders.
16
Bull Flags And Slumbering Bull Flags
Bull Flags form after a sharp up move.
They form a “pole”, which is the prior upmove
Slumbering Bull Flags form after a kind of grinding up move.
Both have the same implication. They both form after a
move up in price.
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The Bull Flag
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Bull Flags in the 30-Year Bond Future
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The Slumbering Bull Flag
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A Slumbering Bull Flag in the /ES
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Bear Flags And Slumbering Bear Flags
Bear Flags form after a sharp down move.
They form a “pole”, which is the prior down move.
Slumbering Bear Flags form after a kind of grinding down move.
Both have the same implication. They both form after a
move down in price.
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The Bear Flag
23
A Bear Flag in Bitcoin
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The Slumbering Bear Flag
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A Slumbering Bear Flag in Bitcoin
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The Ledge Trade
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In the years of Quantitative Easing, bearish patterns such
as the ledge trade worked poorly.
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Now that the Fed is in Quantitative Tightening mode, these
patterns have worked great lately.
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Basically, the theory is, that the more horizontal a trendline
that be drawn, the more significant. This goes with my
theory that the more points that can connect a trendline the
more significant.
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When the stock sells off, through the trendline it’s like
falling off “a ledge”.
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The Brecher Ledge
28
A Brecher Ledge in the /ES Futures
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Many Consolidation Patterns Complete Larger Patterns
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Some of the most powerful moves of these patterns, are
that the breakout of smaller continuation patterns leads to
a breakout of a larger patterns.
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Some of the larger patterns can actually be reversal
patterns.
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A “flag within a flag” is one of my favorite patterns.
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A Bear Flag Within a Larger H&S Top
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Why Are Bull and Bear Flags More Important Now than Ever
The Fed has abandoned their Quantitative Easing for the first
time in years. This leads to more market volatility.
Volatile markets produce more flags.
I like to combine indicators and oscillators, but first I wanted to
show the tight bear flags appearing now.
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AMZN on Friday, Jan 3rd
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Most Consolidation Patterns Have A Distinct Measuring
Implication
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Every one of my consolidation patterns form AFTER a
protracted move. After a period of consolidation, the
pattern will usually play out as a “mirror “ image of the
previous move.
○
Specifically, when a flag is broken, the trendline
will frequently continue in the given direction
nearly the same amount as the previous move.
○
I will show an example in the next slide.
However, many bearish breakdowns from flags see prices
overshoot, as traders are more likely to “panic” on break
downs, than breaks up.
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AMZN on Friday Jan 3rd
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META Yesterday!
I posted this short yesterday while
simulcasting in 3 rooms!
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Many Times Bearish Patterns Overshoot the Downside Objective
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Why Do Flags Form?
The flags I watch usually form after 2 reasons.
1.
2.
A sustained move results in an oversold or overbought condition.
A sustained move stops a prior support or resistance.
In the Bitcoin example, the first bear flag stopped after being oversold.
The second move stopped at long-term support.
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The Bear Flag in Bitcoin
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A Close up of the Oversold Condition Bear Flag in Bitcoin
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Think of an Eye Test
Go for the clear pattern. If it isn’t clear, go to the next one.
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Go for the Clear Pattern. If Not Clear, Go To Another Pattern
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Not All Bull and Bear Flags are Equally Reliable
Most studies say that Bull and Bear flags are successful 50-65% of the time.
These are the factors that I use to increase my probability of success:
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Using candlesticks for my bars on a chart
I assess the tightness of the flag
Combine it with support and resistance
Combine it with indicators like moving averages and ATR trailing stops
Use an oscillator to determine overbought and oversold MACD
Combine it with the movement of stocks in the same industry
Combine it with charts that have similar patterns
Combine it with multiple futures products
You must be aware of fundamental factors including governmental reports, earnings,
geopolitical events and fed policy.
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Candlesticks
I use candlesticks to visually help with support, resistance, and big
short-term reversal patterns.
Even if stocks are trending, big red candles or big green candles can
lead to some good short-term flag patterns.
I like to look for flags at least one timeframe LOWER than the big
red or green candle appearance.
I will share a thinkorswim scan for big candlesticks later in the class.
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A HUGE factor in Pattern Recognition
One of the biggest mistakes traders make is thinking every group of
candles are patterns.
The patterns I use are AFTER the first move.
A HUGE factor are the number of points a trendline can be drawn
The more points of contact, the more important.
The more horizontal the trendline, the more important.
KEEP IN MIND, these patterns form AFTER the first move.
We are not trying to pick tops or bottoms.
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Flags Are More Likely to Work After a Big Candlestick Reversal
At Least One Time Longer Than the Flag
I did this trade Sunday night in front of my wife.
After the nasty red candle reversal in the /ES, the 15 minute /ES
formed a bear flag.
I shorted at 4079, and bought back at the first support near 4070.
I would have stayed in longer if it wasn’t so late in the night.
Later in the class, I will show how if I used stops with indicators, it
could have been used to ride this trade MUCH lower.
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Flags Are More Likely to Work After a Big Reversal At Least One
Time Frame Longer Than the Flag
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Big Red and Green Candlesticks
This 5 minute bear flag worked great in the /ES, after it formed a big red candlestick on an hourly chart.
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The DOJI
The DOJI is an indecision candlestick. Many times I see this at the apex of a flag.
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The Tighter the Pattern, The Tighter the Stop
I have found that I can be more aggressive on tighter patterns, as a
stop can be placed near the breakout.
Tightness means a small price range as the pattern is developing.
As seen in DG, the risk of a stop versus the reward favored taking
the trade.
I will be going over using stops with price, indicators, support and
resistance later in the class.
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The DG Bear Flag
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Support & Resistance
The HUGE Importance of Support and Resistance
So many videos and websites show theoretical bull and bear flags.
The most important aspect of a flag working is where support and
resistance lies.
When scanning for patterns, I ALWAYS see where support and
resistance lie.
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Price Support and Resistance
As with consolidation patterns, price support and resistance consists
of prior price action.
The prior tops become future support, while prior bottoms become
resistance.
The more times a horizontal trendline can touch either bottoms or
tops the more important.
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Prior Resistance Becomes Support
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Price Tops Become Resistance
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Path of Least Resistance
1.
Like a flooded upstairs room, water finds the path of least
resistance, all the way to the basement.
2.
In stocks, continuation patterns are more likely to work if
no support or resistance.
3.
Here is the same chart of Bitcoin shown earlier. Notice the
lack of support underneath.
4.
I call that an air hole, as there is NOTHING underneath
for a long time.
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The Airhole
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The “Air Hole in Bitcoin”
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Path of Least Resistance
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Time for Some Indicators
After price support and resistance, I like using widely
available indicators to help with:
1.
Trend direction
2.
How to stay out of trouble
3.
Possible breakouts
4.
Support and resistance
5.
Where to place stops
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Indicators
Moving Averages, ATR Trailing Stop, MACD, VWAP
Why Indicators?
I try to use the indicators that most traders are watching.
The most watched, the more they work.
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For Trend Direction I Like Using the Following Indicators
1.
Moving Averages
2.
The ATR trailing stop
3.
The MACD
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Determining Trend Direction
In any product, I tend to use the 50 SMA and/or the ATR Trailing Stop
for defined uptrends or downtrends on longer term charts.
I use the MACD to determine if products are overbought or oversold.
Overbought in a downtrend means to look for reversal signals, or
bear flags that have already developed.
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Determination of Trends
One of the keys to using these patterns is know the overall trend.
The most simple gauge of the intermediate overall trend is if a
stock is over or under the daily 50 simple moving average.
For longer term trends, I like to use the 200 SMA.
I also use the ATR trailing stop as it is more sensitive to stock
moves.
This trend identification works for all time periods. But if looking for
direction to enter a trade, I like to use at least ONE time frame
longer to determine a long-term trend.
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The Moving Averages I Use
When looking for longer term trend direction, I usually use
the 200 and 50 simple moving averages.
Usually if a product is under many moving averages it is a
downtrend and vise versa.
Short term, I use moving averages that react more to the
present price range.
These include the 9 exponential moving averages and the
20 period simple moving average.
With all of these, I also use the ATR Trailing Stop.
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The Moving Averages I Use
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Thinkorswim Charts with the Moving Averages
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The Bond Market Is Now in a Weekly Downtrend
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The ATR Trailing Stop
● ATR Trailing Stop is simply a calculation, using the stock’s
Average True Range.
● Average True Range is the average stock price fluctuations
within a certain time period.
● I use it as a great visual for direction changes.
● Note how when EGHT crossed the ATR training stop, the entire
long term direction changed.
● It usually coincides with moving average crosses.
● I use a 2.9 ATR with 9 periods.
● I have found after much experimentation, that these values work
well consistently.
● The ATR trailing stop has worked great, as stops when I am
already in a stock.
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My ATR Trailing Stop Settings
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I Like to Use the ATR Trailing Stop to Look for Entry Points
● Many times, when scanning for bullish patterns, I want to
see a stock price over the ATR trailing stop as one of my
criteria. This can be used for swing and day trading.
● Here is an example of a stock that formed a long term
bull flag over the ATR trailing stop.
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YEXT Was One of My Long Ideas
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I Also Like to Use the ATR Trailing Stop as a Place to Place
Stops
In the earlier example, if a stop was placed at the ATR
trailing stop, the exit would have been 25 points lower!
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Using the ATR trailing stop in the earlier ES trading example
would have given you 25 extra points!
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The ATR Trailing Stop Helps Avoid Disaster
One of the advantages of the ATR trailing stop is
avoiding disaster.
Many try to buy or short stocks too early.
I try to wait for some kind of cross first.
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Check Out How to Avoid Disaster in AMC
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If a Stock Moves TOO Fast, the ATR Trailing Stop Will Widen. Then I will Use
the 20 SMA as my stop indicator.
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What is Overbought and Oversold?
To determine overbought or oversold, an
oscillator needs to be used.
I use the 3,10,16 MACD.
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What Is The MACD?
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The MACD stands for Moving Average Convergence Divergence.
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It’s simply a trend-following momentum indicator.
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MACD consists of 2 lines.
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The Short-Term line, in red, is the difference between two moving
averages. I use the 10 period and the 3 period simple moving averages.
The difference is a line that can be positive and negative.
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The Blue Line is the Intermediate Line. It is the Simple Moving Average of
the Short Term Line. I use a 16 period simple moving average.
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I don’t use the blue line very often, but am starting to experiment to see if
I can use crossover of the two to help with direction.
81
Why the 3,10,16 MACD ?
● I have tried many oscillators, such as RSI, CCI,
and Stochastics. None seem to accurately and
consistently give me the same results.
● I have also tried different values for the MACD.
These values give by far the best results.
82
Time for Some Terminology
I use these terminologies all the time:
1)
2)
3)
4)
Overbought in an uptrend
Overbought in a downtrend
Oversold in an uptrend
Overbought in a downtrend
83
TSLA is Overbought in an Uptrend
As seen, TSLA is above the ATR trailing stop, but overbought. Bull flags MIGHT be found, but
because of the overbought conditions, they are risky.
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My Favorite: Overbought in a Downtrend
Some of the best short ideas happen after a product is overbought under the ATR
trailing stop, or the 50 SMA. Many bear flags present themselves in this situation.
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Oversold in a Downtrend
In this case, I am looking to see how a product works off the oversold condition. Many
times it will work off the oversold by forming a bear flag.
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Oversold in an Uptrend
In this case, I am looking to see how a product works off the overbought condition. Many
times it will work off the oversold by forming a bull flag.
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My Main Chart and Indicator Settings on TradingView
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My Main Chart With ThinkorSwim
In many cases, I show only the ATR trailing stop to make the direction clear. But here is my
normal main chart on TOS. I will use multiple time frames, according to swing or day trades.
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Step by Step on Building My Charts
Let me show live, how I build my charts with TradingView and ThinkOrSwim
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What Are Companion Stocks?
Companion stocks are stocks in the same group or industry.
Many times these stocks move together.
I use barchart.com or finviz.com to look for companion stocks.
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Where to Find Companion Stocks?
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Where to Find Companion Stocks
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What Are Correlated Products?
Correlated products are products that have similar
charts, even if not in the same industry.
For now, index futures and U.S. bonds have
correlated well over the last 6 months.
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What Are Correlated Products?
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One More Indicator… The VWAP
I always like to adapt my trading to maximize my probability of success.
I now use the daily Volume Weighted Average Price, or VWAP, to look
for correlations.
I don’t use it for actual support or resistance zones.
I use it to see how one correlated stock acts to another.
I mainly use it on 1 or 5 minute charts.
If one has a bear flag, and the other has broken the VWAP first, I am
much more confident in taking the bear flag trade.
Here is an example…
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NOW and MDB Have Similar Long Term Charts
NOW broke at 10:30 AM EST. So the probability that the MDB bear flag would work went up.
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Market Feel
Fundamentals
Feel
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There are many types of feel.
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The MAIN one is how a product reacts relative to other
products.
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This is where correlated indexes and products matter.
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If that can be combined with charts, it becomes a
powerful weapon.
Here is an example…
99
UTHR is in a Downtrend
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UTHR broke down after many insiders sold.
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On January 27th, equity markets opened
sharply up led by the /ZB. But UTHR refused
to go up. When the /ZB sold off, so did the
/ES futures. The minute equity markets sold
off, the 5 minute bear flag worked.
100
UTHR is in a Downtrend
101
Fundamental Concepts
What fundamental concepts should I be looking for?
I am looking for anything that might affect the stock markets,
or certain sectors.
1.
Geopolitical
2.
Earnings
3.
Fed policy
But the biggest factor, right now, is the path of interest rates.
Bond prices have broken their 40 year uptrend. This means
more opportunities of downside chart patterns working.
102
Sources
What sources should I use to review the fundamentals?
Here are some sites to look over:
● Bloomberg
● WSJ
● Fox Business
● CNBC
● NYT Business
● Finviz.com for Futures prices
103
How Do I Watch All These News Sources At Once?
I build a Twitter feed with all
these sources in it.
I use Tweetdeck to give me
scrolling updates.
104
How Do I Build My Own Feed?
First go to the plus sign (+) on
Tweetdeck
105
How Do I Build My Own Feed? Part 2
Then press “list”
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How Do I Build My Own Feed? Part 3
Press” create list”
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How Do I Build My Own Feed? Part 4
Name your list
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How Do I Build My Own Feed? Part 5
Start adding feeds, like
WSJ, Bloomberg etc. I like
to check the “add column”
button.
Then press done when
finished.
Now you have a custom
feed you can monitor all
day!
109
How Do I Build My Own Feed? Part 6
110
Upcoming Earnings
Many places will show upcoming earnings.
Like using briefing.com free earnings calendar:
111
Upcoming Economic Reports
I like to know when the
most important U.S.
economic reports are
due.
112
Scans & Watchlists
Scanning for Setups
Scanning for Flags
There are resources on the internet to scan for
flags, but I have not found them helpful:
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StockCharts.com
Finviz.com
Chartmill.com
StockFetcher.com
114
Scanning for Flags Using ThinkOrSwim
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Most know about the Simpler Trading squeeze.
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A squeeze is a contraction in volatility.
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Most bull and bear flags are squeezes, but not the other way around.
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I have tried NR7, NR4, ADX’s under 20, and many more.
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The squeeze just seems to work more consistently in finding flags.
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Keep in mind the scans spit out squeezes, so every one of the results
has to be charted to find the best setups.
115
Multiple Points of Reference
● I cannot stress this enough.
● The more times a line can be drawn that touches a
price, the more significant.
● Flags that are drawn with only a few points of reference
are much less reliable.
116
A Watchlist Helps in Scanning
Normally, I would have this slide somewhere else, but because
of so many stocks in the universe, I wanted to should how I
build lists to scan from.
My first one is my main list.
This includes most of the active stocks, with active options.
The next slides show some of them.
117
Some of My Main List
118
The Hot List
When scanning for flags, volatile stocks have the most flags.
Other than my main list, I will add a list of “hot” stocks.
These can include earnings stocks, high flyers, or
geopolitically-related stocks.
Also, meme stocks are coming back in vogue. I will also build
a list of smaller stocks with weekly, daily or 4 hour squeezes.
These small stocks like to soar if they break out of longer term
patterns.
119
Here are Some Scans #1
Most times, I like 2 time frames of stock over or under their
ATR Trailing Stop or Moving Averages.
This is taking my main list, and added a close under the 1 hour
ATR trailing stop, and then under an ATR trailing stop on time
period longer.
I made the squeeze a 1 hour.
120
Here is the Scan Image
121
A MEME Stock Scan
Now that small stocks are having a run, I like to scan for small, active stocks that have
consolidated, but not broken out yet. Here is a scan:
122
A Breakout Scan
Here is a scanner of stocks that have broken out from their squeeze. This is for stocks up and down. The
criteria is 4 red dots, followed by a green dot.
123
What Time Frames?
After bonds stabilized in the October, the /ES stopped going
down.
As bonds rallied, many bull flags were found on hourly charts.
When daily charts start “turning” I like to scan for hourly flags,
keeping in mind the stock needs to have reclaimed, or rejected,
the long term ATR trailing stop.
Here is CVX “turning”...
124
CVX “Turning”
125
It’s Important To Identify the Time Frames You Are Comfortable With
• If you are not in front of your computer all time,
identify the prevailing trend on a daily or weekly chart.
• Like mentioned before, in this case use a 2 or 6 chart
layout.
• Continuation patterns on a daily work better if the
direction of the pattern coincides with the direction on
the weekly.
• Weekly flags are rare and usually don’t work.
• But the direction of the weekly charts will aid in the
reliability of a shorter time period flag.
126
Multiple Time Frame Chart
Many times, I just use a 6 grid chart on all my main list to look for bull and bear flags that
stand out. Check out the bear flag in ISRG short term. That short trade was posted in
the alerts, and was good for 1.25 points in 40 minutes.
127
My Screen Setup
●
●
●
●
●
Before showing trades, I have to show one of my screen
setups.
To develop feel, a number of readily available indicators
need to be on your screen at all times.
On the left are big stocks I follow. On the top left are futures
I follow.
Then I show big futures, internal indicators, big stocks, and
stocks in the news.
I also add a colored VWAP setting, that shows stocks above
or below their VWAP.
128
One of My Chart Layouts
129
Always Research Your Stock and Look At Correlated Products
• Know the other stocks in the group.
• Know when news events are due.
• Know the factors that could influence the
stock, as oil stocks are influenced by the
price of oil.
• Fertilizer stocks are influenced by futures
prices of Corn, Soybeans etc.
130
Initiation
The Big Picture
When initiating a trade, I like to look at the big picture.
When bonds and stocks are diverging like they are now, on
February 6th, 2023, I am more likely to look for bearish flags.
But small stocks are moving, so I will look for bull flags as well.
The next slide shows the divergence in bonds and stocks.
132
The Big Picture
For now, the /ZB is in a daily rectangle, while the /ES is really outperforming…
If /ZB breaks up, then I have to look for bull flags. If it breaks down, I have to lean short.
This is from February 6th.
133
Bonds Broke, the /ES Followed.
That is from Feb 8th We shorted the SPX early.
134
Initiation
●
Like mentioned, the tighter the price range of the stock in a flag, the
more confident I can be initiating the trade.
●
Usually buy stops can be placed very closely to prevailing prices, if
the break doesn’t work. The next slide shows the initiation in a tight
flag in ISRG today.
●
Today, as seen, the 15 minute SPX chart was under the ATR trailing
stop, showing somewhat a downtrend.
●
As posted in the room, we shorted ISRG on the break around 250.
●
In this case, if it got above 251, I would admit defeat, and go to the
next trade.
●
We made 1.25 points, but eventually this could go down another 5
points.
135
ISRG Bear Flag, Again
136
The Brecher Ledge
When I see an intra-day Brecher ledge, I am more
interested in getting the most “bang for the buck”.
I will usually trade options in this case.
Here is a perfect Brecher Ledge in AMZN.
The longer term, in this case, a 15 minute chart, was
under the ATR trailing stop.
Once the 2 minute horizontal trendline was broken
AMZN went down by the previous move.
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The Brecher Ledge in AMZN
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A Close Up of The Brecher Ledge in AMZN
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Trading Setups
Going over Charts of Good Setups
Here are some of the good setups I use:
1)
A bull flag forms over resistance, but too overbought temporarily
2)
A bear flag forms under resistance, but too oversold on a MACD
basis
3)
Bear flags can form at support, but need to see any oversold
condition worked off, so it has “ammunition” to plow through the
support
4)
A “Brecher Ledge”
5)
A bull or a bear flag has a tiny range, so tight stops can be used
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A Bull Flag Over Resistance
142
A Bear Flag Under Support
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A Bear Flag Working Off the Oversold Condition,At Support,
Before the Next Leg Down
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A Brecher Ledge
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A Brecher Ledge
As seen, the Brecher Ledge formed while the timeframes higher were already in a downtrend.
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When A Stock is Under a Longer Term ATR Trailing Stop, the
Bear Flag Is More Likely to Work
As seen, the Brecher Ledge formed while the timeframes higher were already in a downtrend.
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Where Do You Get Out?
I usually try to get out of half the position at the measuring objective, and then use the ATR trailing
stop cross as a stop.
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Stock, Options, or Futures
In my Chart Patterns Mastery Room, we do a lot of directional
trades.
On intra-day trades, we like to buy or sell stocks according to
break. We also like to buy slight in the money options, but
because of time decay, we like to get out by the end of the day.
Also, if not biotech stocks, I like to look for long term bull flags.
Biotechs can always gap down, so option have to be used
instead of stock.
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The SPY Short
On the left shows the SPY break. On the right shows the break only with the ATR trailing stop.
We shorted on the break(red arrow) and had a stop in at the ATR trailing stop, the purple arrow.
The exit point is when the SPY crossed back over the ATR trailing stop (the green arrow).
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Options
If I see a day trade bull or bear flag setup, I like to use slightly
out of the money call options on Monday through Wednesday.
On Thursday and Friday, I like to use in the money options, as
they have less time decay.
BUT, if I see a huge intraday bull or bear flag, I will buy far out
of the money puts.They have tighter spreads, and if wrong,
you won’t lose much.
Here is a perfect example in LRCX TODAY.
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The LRCX Options
LRCX had formed a huge ledge. I shorted stock and broke
even, but the better play was to buy the waaay out of the
money puts. The spreads on the stock were a dollar wide, so
to me, the out of money options were a better play. This is only
if we anticipate a break today, as time premium could start to
hurt.
LRCX proceeded to go down 7 points.
Let’s show a chart of LRCX, and the time and sales for the
510 puts for this week.
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The LRCX Chart
153
The LRCX Options Had Tighter Spreads Than the Stock
They went from 1.40 to 3.90 on the break!
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Other Options Strategies
• On a bear flag breakdown, I will either buy an at the money vertical
debit put spread, or buy the 70 to 80 delta puts.
• If more conservative, you could sell the just out of the money
vertical call spread.
• On a vertical put spread, I like to place the out of the money side at
prior support.
• If the stock has a more slumbering bear flag, that took a long time
to develop, I will look to buy directional put butterflies, as well.
• One other thing, if earnings are coming out BEFORE the option
expires, they will keep their value more than short dated.
Sometimes, with a well-defined flag, I will buy out the money puts
that include the earnings.
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Why Most Traders Fail
If These Patterns Are So Easy, Why Do Most Traders Lose
Money?
• The BIGGEST faults of traders is not having 3 reasons to initiate a trade.
• The biggest faults of traders is feeling like you “have” to make a trade.
• The hardest thing about these patterns is finding them and identifying the
support and resistance levels.
• Finding great patterns takes discipline and patience.
• Many of these patterns are initiated AFTER the breakouts.
• Many traders give up, just when the initiation should be made
• Picking the time frame you are comfortable with is also very important.
• Charts can fail. Know where to put in stops.
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Why Do Flags Fail
Here are some of the failures of flags:
•
A flag in the opposite direction of the primary trend
•
A flag with “nowhere to go” - Already overbought or oversold
near important support or resistance
•
Stocks that key off other factors, and those factors are failing
•
Example: If crude oil is rallying, and the crude oil stocks
“should” be rallying but they are not
•
The phrase, “they should”, has led to many losses for traders.
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Don’t Trust Flags Opposite the Longer Time Frame Chart
Don’t trust flags opposite the trend, or at least one
time frame higher.
NOW COULD have been a bull flag on a 1 minute on the
right, but on the left the stock was in a downtrend.
However, when NOW broke ABOVE the 15 minute ATR
trailing stop, bull flags then were more likely to work.
159
NOW Bull Flag Failure
.
160
A Flag With Nowhere to Go
UNH just had too much resistance overhead, to trust a bull flag.
.
161
This “Should Have” Stayed Up
CVX cratered 5 days before /CL did the same
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My Morning Trading Checklist
1.
Fundamentals, including stock and geopolitical news, earnings etc.
2.
Overall market perspective
3.
Overall market charts, including areas of support and resistance,on 6
timeframes
4.
Looking for ideas in my main list by looking at 6 timeframes on all of my
stocks.
5.
Looking at Finviz from the night before, to see what were the hottest
stocks, and add most to a “hot list”
6.
Scanning, before the opening, for stocks that might have bull or bear
flags.
7.
Using the “Mark Change” column in a thinkorswim watchlist, look for
the most active stocks, and the ones with big movement
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Let’s do it together
Let’s fire up trading platform and start building our
watchlist for the week ahead!
164
Conclusion
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his screen in real-time as he targets chart
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166
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167