Continuation Patterns
In earlier articles, I have introduced you to basic reversal patterns; double top & double bottom, head-and-shoulder & reverse head-and-shoulder. Besides the reversal patterns, the price patterns falls into another category, the continuation patterns.
While the reversal patterns usually forecast an upcoming trend reversal, the continuation patterns, in the other hand, indicate an interlude in a trend where the stock rests during its uptrend or downtrend. In other words, the stocks pullback or consolidate before breaking out resuming their prior trend.
Generally, the continuation patterns has a distinct difference with a reversal patterns in that the continuation patterns are often very short in the time that they take to setup, or more simply, its duration.
The most common continuation patterns that are well-known among traders are flags, pennants and triangles.
First, let checks out the continuation pattern known as "flag". The flag is a tight consolidation pattern defined as a parallelogram that lines up with the current trend. In almost all cases, flags show up in a very short period in the trading. Traditionally, it lasts three days to three weeks. When it completes its action, the price resumes its previous trend.
The second pattern is the pennant. As the flag's colleague, the pennant resembles the flag, except that it moves horizontally in the shape of small, symmetrical triangle. In the other words, the pennant is often more symmetrical in design and somewhat horizontal in shape. The pennant, too, lasts for very short period in trading. In fact it often represents as few as seven to ten trading days.
Both flags and pennants are preceded by a flagpole, one day of dramatic trading with heavy volume. They last a period of one to three weeks in time and the prevailing trend then continues. Because the setup time is so short, you will only be able to witness flags and pennants in daily chart.
The last continuation patterns discussed in this article is the triangles. Triangles appear in the following forms: ascending, descending and symmetrical.
The ascending triangle consolidates sideways between converging trend lines, with the upper line staying relatively horizontal while the lower line rising.
The descending triangle forms the same way as the ascending triangle, only upside down.
The symmetrical triangle formed as a consolidation pattern begins with a wide price range that gets squished from the bottom and the top into a tighter and tighter range. Although it is a continuation pattern, when the price can break out either way of the pattern.
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