Pennant, Flags, Wedges, Rectangles – Short Duration Continuation Patterns
Shorter duration patterns that are commonly found as continuation patterns are – flags, pennants, wedges, rectangles, head and shoulders continuation pattern. We will discuss the head and shoulders continuation pattern along with the reversal pattern since they have similar attributes.
There are other patterns such as the broadening formation and the diamond shape, however these are rare but the same principles apply.
Pennants, Flags, Wedges
We look at the key features of flags, pennants and wedges – Both are precede by a sharp up or down move. The market is basically briefly pausing before running in the same direction.
The flag is a parallelogram that tilts against the prevailing trend. In a downtrend the flag tilts upwards and visa versa. The pennant resembles a small symmetrical triangle but lasts for a much shorter duration, no more than 3 weeks. Both the patterns should have a duration around 1-3 weeks. Volumes should be very thin when the patterns are forming and high during breakouts. These two patterns are known to usually form about halfway to the target therefore the distance covered post the breakout will equal the size of the flagpole. On the breakout, the trend will tend to replicate the flagpole.
The wedge is similar to the symmetrical triangle in the intermediate trend category. Unlike to symmetrical triangle, the wedge forms a noticeable slant against the prevailing trend. Therefore a falling wedge is bullish and a rising wedge is bearish. If at all there is a rising wedge at the end of a rising trend or a falling wedge in a bearish trend it could signal a reversal pattern rather than a continuation pattern.
Rectangle pattern is usually easy to spot as its formed when prices move sideways in an area between two parallel lines called the trading range. This pattern could be the formation of a continuation as well as a reversal pattern and therefore care must be taken. Traders also trade the prices within the range selling on the top line and buying at the bottom line till the breakout. Keeping a watch on volumes can give a better indication of where the prices can breakout. Higher volumes on an up move can signal the breakout will be on the top line and visa versa. Rectangles typically fall in the 1-3 month category patterns. The price move measurement is the same for other formations based on volatility. Measure the hight of the rectangle and project that from the breakout point giving the minimum distance prices should travel.
Next we study reversal patterns.