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In our last lesson we looked at strategies for trading the rising wedge pattern and falling wedge pattern in the stock, futures, and forex market. In this lesson we are going to start our series on continuation patterns with two chart patterns known as Flags and Pennants.
Typically seen after a big move in one direction in a particular financial instrument, flags and pennants represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a "flagpole" which is represented by the sharp move upwards or downwards, and then the flag portion of the pattern which forms when there is a consolidation which can be encompassed with a rectangle, or a pennant portion of the pattern which forms when there is a consolidation which can be encompassed by a symmetrical triangle.
When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen as a resumption of the uptrend. Conversely when a flag or pennant occurs in a downtrend a break of the bottom support line can be seen as a resumption of the downtrend.
As you can see in the below example the flag portion of the bull flag pattern is encompassed by two parallel lines. These lines can be either flat or pointed downward representing the consolidation in the market. The pole is then formed by a line which represents the move big move upward which sets up the bull Flag. The pattern is seen as the market potentially just taking a "breather" after a big move before continuing its move upward and is thus referred to as a bullish pattern.
The bear flag occurs in down trends and is exactly the same pattern as the bull flag, simply flipped upside down. The lines which form the flag can be either flat or pointed upward, and the pole of the pattern is then formed by a line encompassing the move downward which sets up the bear flag consolidation. The pattern is seen as the market potentially just taking a "breather" after a big move downward before continuing its move downward and is therefore referred to as a bearish pattern.
Similar to a flag, a pennant pattern forms when the consolidation in the market narrows as it matures requiring a more triangular shape to encompass the move instead of a square shape which forms the flag pattern.
Just as with the Bull Flag the pennant portion of the pattern can be either pointed straight ahead or downward and the pole is formed by the move upward which sets up the pennant shaped consolidation.
Just as with the Bear Flag the pennant portion of the pattern can be either pointed straight ahead or upward, and the pole Is formed by the move downward which sets up the pennant shaped consolidation.