There appears to be a potential bear flag continuation pattern on IWM with a sell signal to come on a solid break below the pattern (and soon). The reason I say that it must happen ‘soon’ is because the flag appears fully developed but if IWM were to continue rising well into next week, the flag would be too big proportionally in relation to the flagpole (the impulsive move leading down to the formation of the flag). I also refer to this as a ‘potential’ bear flag since the small-caps would need to reverse soon & go on to trigger a sell signal on a solid (and ideally, impulsive) breakdown below the flag in order to finalize & validate the pattern. Daily chart below.
IWM daily Aug 24th
While the typical sell (short) trigger is to wait for breakdown below the flag, at times (like now), I will take a starter short position at the top of the flag once it appears to have reached its full size relative to the flagpole, adding to a full position if/when a sell signal is triggered on a break below the pattern. In doing so, I will set a relatively tight stop above entry because if IWM continues much higher, this ‘potential’ bear flag will no longer be a bear flag. As such, while the probability of the trade being successful is considerably lower than waiting for a breakdown below the flag, that lower probability of success is more than offset by the excellent R/R (i.e.- very minimal loss, if stopped out, compared to the profit potential, should the pattern play out & the measured target is hit). In this case, I am using a stop just above 1% above & the gain (on this starter lot) if my price target is hit would be over 8% (i.e., an 8:1 R/R).