The bull flag pattern is created with a sharp rise higher forming the pole, which is then followed by a consolidation pattern that brings the stock lower between a channel with parallel lines or into a tightening triangle pattern.
For bearish traders, the “trend is your friend” (until it’s not), and the stock may continue downwards within the following channel for a short period of time. Aggressive traders may decide to short the stock at the upper trend line and exit the trade at the lower trend line.
Bullish traders will want to watch for a break-up from the upper descending trend line of the flag formation, on high volume, for an entry. When a stock breaks up from a bull flag pattern, the measured move higher is equal to the length of the pole and should be added to the lowest price within the flag.
A bull flag is negated when a stock closes a trading day below the lower trend line of the flag pattern or if the flag falls more than 50% down the length of the pole.
The measured move, if GameStop breaks up bullishly from the flag formation, is about 12%, which suggests the stock could rise toward $27.50. Bullish traders want to see the stock break up from the downward sloping flag on higher-than-average volume to indicate the pattern was recognized, which would also confirm a new uptrend.
The consolidation within the flag has been taking place on lower-than-average volume, which is healthy. The candlesticks within the flag also have lower wicks, which suggests bulls are buying the dip when the stock falls under $25.
The stock is also trading above the 200-day simple moving average (SMA), with the 50-day SMA about to cross above the 200-day. If GameStop continues to trade above the levels for another day or two, the 50-day SMA will cross above the 200-day, which will cause a golden cross to form.
Bearish traders want to see big bearish volume come in and knock GameStop down under the eight-day exponential moving average, which would negate the bull flag. If that happens, the stock could continue to retrace toward the 200-day SMA.
GameStop has resistance above at $26.55 and $28.34 and support below at $24.03 and $21.89.
Produced in association with Benzinga
Edited by Joseph Donald Gunderson and Alberto Arellano
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