Recently, we’ve been discussing the power of trend continuation setups.
They keep you on the right side of the market, making sure you don’t trade against the larger trend.
They also offer great reward-to-risk opportunities. It’s not uncommon for trend continuation setups to return 100% or more on a trade.
When you have a strategy that consistently delivers great returns and is right more often than wrong, you have a recipe for building long-term wealth.
The last trend continuation pattern we looked at was in XHB, the SPDR S&P Homebuilders ETF. And while we’re waiting to see whether the pattern will break out higher or not, I have another setup to share with you.
Look for the Bull Flag
This time, we’re looking at a healthcare ETF, XLV.
I first put XLV on your radar on December 20. At the time, the ETF was getting ready to break out of a large triangle pattern.
The triangle had been taking shape since April 2022. Prices finally broke out of the pattern on January 2.
And now, we’re seeing a smaller trend continuation pattern that we’re going to examine closely.
This kind of setup is one of my favorites.
When a large pattern breaks out, like the triangle in XLV, it can be difficult to figure out where to place a stop loss.
Often, a large pattern also comes with a larger stop loss.
That’s why waiting for a secondary pattern to take shape is a great strategy. A little bit of patience can pay off in a big way.
All you have to do is wait for the secondary pattern, which will always be smaller than the first, to break out.
In the case of XLV, this secondary pattern is a bull flag.
Let’s check it out on the chart below.
A bull flag occurs after a strong run-up in prices, and the market has to take a breather. This part is the same for all trend continuation patterns.
In the case of XLV, prices traded from $122.60 to $141.55 over 73 days without any major pullbacks.
That sets the stage very nicely for our bull flag. A bull flag is a controlled pullback that is contained by parallel lines.
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I’ve drawn the outlines of the flag using the blue trendlines.
What we’re waiting for next is a breakout above the upper trendline of the pattern. This will signify that the pullback is over, and the next strong trending run is about to begin.
Finally, we can use the base of the pattern as a stop-loss level. Currently, that level is $137.
And because my target for this pattern is around $150, this would give us a very favorable risk-to-reward ratio on the trade.
Happy trading,
Imre Gams
Analyst, Market Minute