Flag, Pennant (Continuation)
Flags and Pennants are short-term continuation patterns that
mark a small consolidation before the previous move resumes. These patterns are
usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the
move.
1.
Sharp Move: To be considered a continuation pattern, there should be
evidence of a prior trend. Flags and pennants require evidence of a sharp
advance or decline on heavy volume. These moves usually occur on heavy volume
and can contain gaps. This move usually represents the first leg of a
significant advance or decline and the flag/pennant is merely a pause.
2.
Flagpole: The flagpole is the distance from the first resistance or support break to the high or low of the
flag/pennant. The sharp advance (or decline) that forms the flagpole should
break a trend line or resistance/support level. A line extending up from this
break to the high of the flag/pennant forms the flagpole.
3.
Flag: A flag is a small rectangle pattern that slopes against the previous trend. If the
previous move was up, then the flag would slope down. If the move was down,
then the flag would slope up. Because flags are usually too short in duration
to actually have reaction highs and lows,
the price action just needs to be contained within two parallel trend lines.
4.
Pennant: A pennant is a small symmetrical
triangle that begins wide and
converges as the pattern matures (like a cone). The slope is usually neutral.
Sometimes there will not be specific reaction highs and lows from which to draw
the trend lines and the price action should just be contained within the
converging trend lines.
5.
Duration: Flags and pennants are short-term patterns that 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 debatable.
6.
Break: 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.
7.
Volume: 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 credence to the validity of the formation and the likelihood
of continuation.
8.
Targets: The length of the flagpole can be applied to the
resistance break or support break of the flag/pennant to estimate the advance
or decline.
Even
though flags and pennants are common formations, identification guidelines
should not be taken lightly. It is important that flags and pennants are
preceded by a sharp advance or decline. Without a sharp move, the reliability
of the formation becomes questionable and trading could carry added risk. Look
for volume confirmation on the initial move, consolidation and resumption to
augment the robustness of pattern identification.
·
Sharp Move: After consolidating for three months,
$index is near the support level of 78.9 and has give a sharp recovery and is
trading near 80 level. This is showing
reversal sign as the candle formation is also showing reversal and strong
buying.
·
Flagpole: The distance from the breakout at 73.4 to
the flag's high at 84.6 formed the flagpole.
·
Flag: Price action was contained within two
parallel trend lines that sloped down.
·
Duration: From a low at 78.55 to the breakout at 84.6
the flag formed over a 1 Year period.
·
Breakout: The first break above the flag's upper
trend line occurred without an expansion of volume. However, the $ index
·
Targets: The length of the flagpole measured 10
points and was applied to the resistance breakout at 84.6 to project a target
of
95.25.
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