Looking at the on the four hour XLM chart, I can see why some people didn't recognize it as a . Particularly, the shape is a bit awkward, and the elongated (solid black ,) relative to the flag pole (dashed ,) may have thrown some people off. As you can see, the flag part extended through about 80% of the pole. When people see this, they often think that it isn't a . What is important to understand, however, is that the flag can retrace nearly 100% of the pole, and still be a perfectly legitimate . If the flag portion began to break out ABOVE the highest point of the pole, that would negate the pattern. However, in this case, we never saw that, and the breakdown ensued.
With that said, it is extremely important for people to understand that they should never trade flags on suspicion. If you see a , you don't ever short it, until you see a breakdown — simply because flags don't always work. Also, it's important to look at the history of flag formations, in the asset that you're reviewing. If I'm looking at SPY for example, and I see a , I will look through the recent history of SPY , to see how bear flags have worked in the past. This gives you a bit of an idea, as to how likely it is for the pattern to play out as expected. Furthermore, I will look for other indicators on the chart. There is no sense in trading a , if every other indicator is extremely , because it probably won't break to the downside. It's also very wise, to take note of the overall trend, and see if it corresponds with the flag. Looking here at the XLM chart, you can see that we've fallen from the pattern (which I projected before the right shoulder even existed) and then it fell into a . These are two successive patterns, which gives more legitimacy to the newly formed . Also, it's important to look at levels, in relation to the flag. If you recall from yesterday's post, I noted that the 50 and the 200 were intersecting the flag. Therefore, I knew that resistance would be met, inside of the flag, which increases the likelihood of a breakdown. , momentum, , and many other indicators can also be used to assess the validity of a . Those are a bit more advanced , however, and I want to keep this simple.
So, where is XLM headed from here? Well, as you can see, there is pink dotted level of support on the chart. It's actually beginning to correspond closely with the bottom of the formation, and there isn't much support until we get down there. Some people may look at the little peak on the rally to the all time high, and site it as support, but you can see that it wasn't supportive at all, on the two dips below it. Ultimately, I think it is only a matter of time, before we test the bottom of the . Godspeed with the flags everyone!
This has been your not-so-humble market wizard, droppin' knowledge like bombs in this place! Please follow, comment, like, and share on social media. Good luck trading everyone!
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
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