Sunday, October 17, 2010

Flags and Pennants

Flags and pennants can be categorized as continuation patterns.  They usually represent only brief pauses in a dynamic market.  They are typically seen right after a big, quick move.  The market then usually takes off again in the same direction.  Research has shown that these patterns are some of the most reliable continuation patterns.
Bullish flags are characterized by lower tops and lower bottoms, with the pattern slanting against the trend. But unlike wedges, their trendlines run parallel.
Bearish flags are comprised of higher tops and higher bottoms.  "Bear" flags also have a tendency to slope against the trend.  Their trendlines run parallel as well.
Pennants look very much like symmetrical triangles.  But pennants are typically smaller in size (volatility) and duration. 
(Volume generally contracts during the pause with an increase on the breakout.)

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