Tech Stocks Surge: Chart Patterns Signal Bullish Momentum, According to Expert Katie Stockton

By Katie Stockton with Will Tamplin

May 27, 2024

In a market environment ripe with positive momentum, chart patterns known as 'flags' are signaling bullish short-term implications for several tech stocks, according to technical analyst Katie Stockton of Fairlead Strategies. These patterns, characterized by a period of sideways consolidation following a sharp rally, suggest potential for sustained upside momentum. On daily charts, breakouts from these flag patterns can persist for days or even weeks, often resulting in an advance that mirrors the initial 'flagpole' and ideally supported by above-average volume.

Understanding the Bullish Flag Pattern

The bullish flag pattern is a technical indicator that appears during strong uptrends. It signifies a pause in price action before the trend is expected to resume. The pattern consists of two main parts:

• The Flagpole: This represents the sharp, almost vertical price increase that precedes the consolidation.
• The Flag: This is the period of consolidation, where the price moves sideways in a tight range, often forming a small rectangular or pennant shape.

A breakout occurs when the price moves decisively above the upper boundary of the flag. This breakout is considered a buy signal, with the expectation that the prior uptrend will continue. The target for the move is often projected by measuring the length of the flagpole and adding it to the breakout point.

Notable Tech Stocks Exhibiting Flag Patterns

Stockton highlights several technology sector companies that have recently shown these bullish patterns:

Zcash (ZEC)

While not a traditional tech stock, the privacy coin Zcash recently provided an example of a flag pattern breakout. Its April-May advance demonstrated the importance of acting quickly on such signals, as the measured move projection was achieved swiftly.

Dell Technologies (DELL)

Dell Technologies has been a prime example, exhibiting a series of flag breakouts as it trends higher. Stockton suggests that these consolidation periods have repeatedly refreshed the uptrend, indicating that traders should welcome such pauses after steep rallies.

Arm Holdings (ARM)

Semiconductor stocks, a leading source of upside in the market, have been particularly rich in flag pattern examples. Arm Holdings' recent breakout is cited as evidence of how explosive these rallies can be, achieving its measured move target in just three days.

Lam Research (LRCX)

Lam Research is identified as a potential new flag breakout candidate in the semiconductor sector, having emerged from a digestion phase late last week. If the pattern holds, LRCX is expected to advance similarly to its late April rally, which saw a significant 23% gain.

Market Context and Outlook

Flag patterns are continuation patterns that perform best within strong uptrends. The current market environment has been conducive to their formation. However, Stockton cautions that such conditions can change rapidly, and traders should monitor if these breakouts continue to be effective.

"Flags are continuation patterns that tend to have the best outcomes within strong uptrends," Stockton notes. "Of course, top-down influences contribute to their success rate. While the current environment has been conducive to flag patterns, that could change quickly, so we would pay attention if flag breakouts stop working."

This article includes research from Fairlead Strategies. Disclosures are available on the CNBC Pro platform.