Continuing patterns 1 : Flag & Pennant

A continuing pattern indicates that the prior trend will continue onward upon the pattern’s completion.

The Flag and pennant are two short-term continuation chart patterns that are formed when there is a sharp price movement followed by a generally sideways consolidation. The price then moves sharply either upwards or downwards but generally in the same direction as the move that started the trend. By using the term ‘Flag’ it doesn’t mean that the trend formation would look exactly like a flag. The basic characteristic of a flag pattern is that it will have two trend lines sloping generally in the opposite direction of the initial price movement The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be backed by heavier volume to improve the signal of the chart pattern.

EXAMPLE

You may notice the following –

There are two trendlines drawn, both sloping downwards e in the opposite direction of the initial price movement. Through the trend lines you see certain price level beyond which the stock prices neither fall nor rise. These points are support and resistance levels in the flag pattern. Once the price breaks out of the resistance level, the stock prices continues to move in the initial direction ie upwards.

PENNANT

The pennant is slightly different from the flag pattern. Here the two trendlines converge towards each other and the direction of the pennant is not important as in the case of flag.

EXAMPLE

The attributes of the flag and pennant are similar and it can be summarized as follows:

SHARP PRICE MOVEMENT

It all starts from a prior trend. There should be evidence of a prior trend – either upwards or downwards. Such a price movement should be backed by heavy volume.Such moves may also contain gaps (we’ll discuss the theory of gaps later). Such a move usually halts or pauses temporarily causing sideways movement for sometime, resulting in a flag or pennant formation.

DURATION

The sideways movement (flag/pennant) can last from 1 to 12 weeks. There is some debate on the timeframe and some consider 8 weeks to be pushing the limits for a reliable pattern. Ideally, these patterns will form between 1 and 4 weeks. Once a flag becomes more than 12 weeks old, it would be classified as a rectangle. A pennant more than 12 weeks old would turn into a symmetrical triangle. The reliability of patterns that fall between 8 and 12 weeks is therefore debatable.

BREAKING THE FLAG/PENNANT

For a bullish flag or pennant, a break above resistance signals that the previous advance has resumed. For a bearish flag or pennant, a break below support signals that the previous decline has resumed.

HEAVY VOLUME

Volume is the key. Volume should be heavy during the advance or decline that forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp move that creates the flagpole. An expansion of volume on the resistance (support) break lends credibility to the validity of the formation and the likelihood of continuation.

We’ll take up triangles in our next article.

Bye for now..

have a nice day !!

You may like these posts:

  1. A study of chart patterns
  2. Importance of Volume in Technical Analysis
  3. Trendlines

3 Responses to “Continuing patterns 1 : Flag & Pennant”

Debra

September 21, 2011 at 4:53 pm

You Sir/Madam are the enemy of confusion eevryewhre!

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