extremely heavy just before the point at which the flag formation begins.As the formation develops, activity gradually contracts to almost nothing. Itthen explodes as the price works its way out of the completed formation.On the daily charts, flags can form in a period as short as five days or takeas long as three to five weeks. It is also true to say that flags are starting tobecome an endangered species. Searching for examples for this book, especiallya pause within a vertical rise or fall, became quite a challenge.Whenever a concept becomes this difficult to demonstrate with real-liveexamples, I start to question its usefulness.The formation of the flag in a downtrend is also accompanied by decliningvolume. This type of flag represents a trading range with an upward biasin price, so the volume implication is bearish in nature, i.e., rising price withdeclining volume. When the price violates the lower part of the flag, thesharp slide continues and volume tends to pick up. However, it need not beexplosive, because prices can just as easily fall due to a lack of bids as theycan because of strong selling pressure. Only upside breakouts in bull marketsrequire heavy volume.It is important to make sure that the price and volume characteristics agree.For example, in a bull trend, the price may consolidate following a sharp rise,in what appears to be a flag formation, but volume may fail to contract appreciably.In such cases, great care should be taken before coming to a bullish
conclusion, since the price may well react on the downside. A flag that takes
more than four weeks to develop should also be treated with caution. This is
because these formations are, by definition, temporary interruptions of a
sharp uptrend. A period in excess of four weeks represents an unduly long
time for profit taking, and therefore has a lower probability of being a true
flag.
Flags are usually reliable patterns from a forecasting point of view. Not
only is the direction of the ultimate breakout indicated, but the ensuing
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