Flags and Pennants
Both flags and pennants are short-term continuation patterns, marking a consolidation period before the previous move continues. They are usually preceded by a sharp advance (bullish flag/pennant) or decline (bearish flag/pennant) and mark the mid-point of the broader move. Volume should confirm the initial move, consolidation and resumption. Heavy volume tends to accompany the initial move and breakout, while volume subsides considerably during consolidation phases.
Flag: A flag is a rectangular pattern that forms at the end of a sharp advance or decline. It slopes against the previous trend – if preceded by an advance, the flag slopes down; if preceded by a decline, the flag slopes up. The price should be contained between two parallel trend lines, which forms the flag pattern.
Pennant: A pennant is a symmetrical triangle that converges as the pattern matures. There is no specific slope of the triangle necessary to identify the pattern; however, the price action should be contained between the two converging trend lines forming the pennant.
Price Targets: The price target for a flag/pennant break out is determined by the size of the flagpole (the distance of the sharp advance or decline that precedes the pattern). This distance is applied to the breakout point to determine the target.
Just like flags and pennants, wedges have a bullish or bearish tilt. The patterns begin wide and contract as the trading range narrows, typically on lighter than average volume. There are no price targets based on wedges.
A Rising Wedge is a bearish pattern that contracts as prices move higher, narrowing the trading range as it matures. The loss of upside momentum on each successive high gives the pattern its bearish bias. It acts like a spring that is tightening. Once it’s clear that the bulls momentum is waning and the shares have little room to run on the upside, the shares spring to the downside.
A Falling Wedge is a bullish pattern that contracts as prices move lower. The loss of downside momentum on each successive low gives the pattern its bullish bias.