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We can see this flag pattern in a couple of different places. We see it here, here, and here, in a rather sharp way. We see it here. This one failed, however, when it failed to break through this resistance point. Prices did go back up from there.
The important thing to remember is that prices will have the slow erosion. After making significant progress to the upside, there’s a slow erosion of prices over time, that look fairly straight down. In fact, they are continuation patterns.
Opposite of that are patterns in which the market will start to decline. If we go back over some of these patterns, in which large price drops have taken place, you can see that instead of having a controlled little decline like this one here, in a straightforward fashion, this happened to be somewhat rounded at the top.
Let’s take another example. Here is the second pattern in which prices decline sharply. You have this rather rounded top, in which prices shot up. They did form a slight little flag pattern right in here, to indicate that prices would continue higher. They did. However, at that point, it created a larger rounding process. This rounding process indicates that market prices will generally drop.
You have this higher bar. You have a down day. You have another down day. Then you have an up day in here, and another day in which the prices almost meet each other. This rounding of this tip is considered a bearish pattern. Here is another rounding top. It’s very difficult to see, if you’ve never seen this type of pattern before. Once you recognize it, you begin to see it in a lot of different stocks. It’s kind of a semi-round pattern.
Here it is again. Slightly higher highs, and then another higher high that rounds off with this one right here. A slightly rounded pattern. Here is a very good example of this rounded pattern. Higher, higher, flat, flat. They’re all very flat, at one particular point. It’s an extreme rounded pattern.
Here’s another one, where it’s very rounded, as it continues to increase in price. When prices are ready to decline, you generally see this kind of rounded pattern at the top of a particular market or index. When prices are going to continue, they form flags.
Here is a very good example of a flag. These are straight down patterns. There is no rounding in here. It doesn’t have to be exact. This is just a general trend of the price after it has moved up. It has this downward slope to it. It’s not rounded. There is a downward slope.
Now, look what happens when you have a continuation pattern on the downside. Here, we have a rounded top. How would we know whether or not this trend is going to continue? We have a flag. The flag not only works for markets that are going up, as in these cases. It also works for markets that are moving down. A flag pattern will develop, in which prices will slowly begin to rise, after a downward pattern. These prices will rise, and then round off again, in order to continue the decline.
These patterns are so prevalent in the market. They do take some training in order to try to see them. It’s very difficult. Once you begin to recognize these patterns, you can begin to at least have a good idea of how well, and what the probability is, that the market will either fall, continue its up-trend, if it’s in an up-trend, or continue to fall, if it’s in a down-trend.
Here is the rounded pattern. Here are two others. This one is only three bars long, but this one was a little bit better, actually. It had three bars in it. It doesn’t matter how many bars are in the pattern. When you get this rounding type of effect, rather than something that goes like this, straight down – this straight down pattern will indicate that prices will go higher. This rounding pattern will indicate that prices will probably go lower.
In between these, you have flags. Here is another one, right here. This is a perfect flag, isn’t it? Prices don’t have a real bottom. There is a slight bottom here, but what they do is, they continue to move up, in a very slow, methodical fashion, from where they were. It forms this little flag pattern.
Once you get used to looking for these flag patterns, and you get used to them, it will help you tremendously in your ability to find high probability trades. Let’s say you saw this rounded top, here. Prices came down. How do you know that it’s not a good time to buy and go long, hoping that prices will continue the up-trend that it has already established?
One clue is the way that prices reacted after falling. They gradually moved up, forming a flag pattern. At that point, you would have known that this was a continuation pattern. You would have gone short, because it’s establishing a continuation pattern of this downward trend that was established here.
Let’s take a look at current market conditions. Currently, we have two tops, that formed a very broad, rounded pattern here. In addition, each point of its own, was a rounded pattern. Prices declined here, but then formed a flag right here.