Flags and Pennants
Flags and Pennants are short term continuation stock patterns. They usually represent only brief pauses in either an uptrend or downtrend.
The stock usually takes off again in the same direction.
Chart by MetaStock
If you were to sit down and study a number of charts today, you would be able to see a number of pennants and flags, as shown in the chart above.
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The following are key points in confirming the Flags-and-Pennants patterns:
- Prior Trend: To be considered a continuation pattern, there should be evidence of a prior trend.
- 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.
- Pennant: A pennant is a small symmetrical triangle that begins wide and converges resembling a cone.
- Duration: Flags-and-pennants are short-term patterns that can last from 1 to 12 weeks. 8 weeks would 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, or a channel. A pennant more than 12 weeks old would turn into a symmetrical triangle. - 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.
- Volume: Volume should contract during the pattern formation, and increase on the breakout.
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Research has shown that these patterns are some of the most reliable continuation patterns, and are commonly used when swing trading.
Technical indicators such as the RSI Indicator and the Stochastics Indicators are used to confirm the pattern.
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