Flag and Pennant
The flag and the pennant are different continuation patterns, but I put them together here as they have the same characteristics and usually are seen in the same context. They are short term patterns, lasting normally one to three weeks, and can be looked on as pauses in a trend. The flag looks like this –
It, and the pennant, are seen in a position as shown, where there has been a sharp move in the price. It’s almost as if the price has to catch its breath after the surge before continuing on. The flag can occur in both up and downtrends, is a pair of parallel trendlines, and can be expected to slope against the trend – so in a downtrend, it would slope upwards. Perhaps because of the strength of move beforehand, it’s very rare that a flag pattern would let you down and become a reversal. It and the pennant are considered some of the most reliable continuation patterns.
Here is an example of the pennant formation –
As you can see, very similar to the flag. It looks a bit like the symmetrical triangle, but there are two big differences. First, it comes after a steep rise (or fall) as shown. Second, it is much shorter in duration.
Both the flag and the pennant will show a big drop off in volume as the pattern develops. You should get a good increase in volume when the price breaks out. When the price breaks out, the pattern is considered completed. Both patterns are expected to be at about the halfway point of the price move, that is you can expect about as much rise after the pattern as occurred in the burst that preceded it.
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