We use a strict definition, which improves the probability of success. Trading tactics for flag pattern are discussed in my book "Snapshot Trading." This is precision pattern trading.
The flagpole was $16 high and the breakout target was calculated at near $41. This uses the price level where the price moved above the upper edge of the flag pattern. The run from near $25 to $41 kept the heart muscles pumping. Usually this flag pattern behavior develops a consolidation near the target projection level and this is a signal to exit the trade.
In very strong bull markets the flag pattern may continue and reach a second target level, which is twice the projection of the original breakout target. Even in bull market conditions this is an unusual event. The second projection target is near $56. This is calculated by taking the value of the first projection range and projecting it upwards from the top of that range.
In a market that is dominated by green shoots this double-target-momentum behavior is the equivalent of weed killer.
Some weed killers operate by encouraging such excess growth that the weed literally grows itself to exhaustion. This the key concern with the chart pattern and behavior with AIG . This type of momentum trend is unsustainable in the long term. For traders who hold the position the protect profit signals have already been delivered with the retreat from the second price target level at $56.
The remaining key questions revolve around the extent and the nature of the price retreat. It is usual to see some consolidation develop around the first target level prior to a continuation of the momentum. This has not happened with AIG. There is no consolidation or pause in momentum near $41. This suggests that any price retreat is unlikely to find support at this level.
AIG developed a small consolidation behavior near $340. This consolidation behavior identifies a potential support area from the retracement from $56. Traders will not buy as soon as price nears this level. Cautious traders will wait to see evidence the support level can hold. When they also see evidence of a rebound it provides a buying opportunity with an initial target near $41 and higher.
Generally a flag pattern momentum will collapse back to an underlying long-term trend. The potential for this trend can be defined with the trend line starting from the $13 low and touching the lows near $23 that were the starting point for the most recent momentum move. This is a tentative trend line. The position of the line remains to be proven by a price retreat to the line followed by a rebound. A fast retreat will drop price towards the consolidation area round $34 where it may also find potential support from the trend line.
Failure to hold at this combined support feature gives a downside target near $28, which is near to the peak of the flagpole breakout. Flag patterns show momentum continuation, but they do not inevitably show trend continuation. It is the nature of the pullback and rebound that will define the strength and character of the long-term trend in AIG.
Until then, AIG is a traders stock so believe the chart and not your heart which longs for a stock price with three figures.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.