Flag Pattern is one of the most popular chart patterns formed by price action which is contained within a small rectangle or a channel in the shape of a flag. Flags are short-term continuation patterns that mark a small consolidation before the previous up move resumes.
A flag chart pattern is formed when the market consolidates in a narrow range after a sharp move. Flags pattern breakout usually gives low risk –high reward opportunity. The flag pattern set up occurs in an on-going rally or decline phases, the pattern results in a move in the prior direction. Flags can be seen in any time frame but normally consist of about 5 to 15 price bars.
Why Buy Tata Motors?
There are pressure areas in a stock chart, which may be minor support or resistance, or it may even be a minor target point. In this zone some traders book profit; however, the trend remains unchanged. This may result in a small swing or the price may remain flat. Both the support and resistance lines are either horizontal or sloping downwards in an uptrend or sloping upwards in a downtrend, forming a flag. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move. The pattern has a "flag" appearance because the small rectangle is connected to the pole (the large and swift move).
Tata Motors has given a nearly vertical move towards Rs 170 levels from Rs 135 which has formed pole of the Flag pattern. Flags are often considered continuation patterns, meaning that the breakout tends to theoretically occur in the direction of the preceding move, and in case of this stock a close above Rs 175 has confirmed the breakout. The formation usually occurs after a strong trending move that can contain gaps. At the same time, decisive trading above moving averages is also supportive for price movement. Looking at mentioned parameters one can stay long in Tata Motors.
Figure.1. Flag pattern and Buy signal on Tata Motors
1. A decisive close above resistance line (Rs 175) of Flag pattern, has given a pattern breakout.
2. Prices are already trading above short-term moving average 20 DMA (Rs 155) which will define bullish short-term trend.
3. Mid- term moving average 50 DMA (Rs 142) defines mid-term trend which augurs well with bulls as prices are sustained and trading above it.
4. Decent volume participation while pattern breakout will also give additional confirmation.
Target as per Flag pattern is calculated by adding the length of the Flag to the breakout point. But looking at the momentum, the stock will get close to Rs 200 which is the high made in January this year.
Entire bullish view negates on breaching of the support line of the flag pattern on closing basis. In that case, one should exit from the long position, for Tata Motors these levels are placed around Rs 162.
We recommend buying Tata Motors around Rs 178 levels with a stop loss of Rs 162 for higher targets of Rs 200.
(Shabbir Kayyumi is the Head - Technical Research at Narnolia Financial Advisors Ltd.)
Disclosure: Narnolia Financial Advisors Ltd. is a SEBI registered Research Analyst having SEBI Registration No. INH300006500. The Company/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks.
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