The flags and pennants are common continuation patterns that have similar exterior. They also have the same volume formation and measuring criteria. These patterns are relatively shorter in time duration and should preferably be completed between one to three weeks.
The flags and pennants are short pauses in a vibrant market progress. An obligation for both the patterns is that they should be preceded by a sharp and approximately straight-line move. This vertical move could be in either direction, up or down. While this move pauses for a while, the flags and pennants are formed. The security resumes the prior trend following the completion of these continuation patterns. These patterns are the most trustworthy of the continuation patterns and they rarely, if ever, turn out to be a trend reversal.
If you are wondering why these patterns are called by different names despite similar features, here is why – there is a difference in the construction of these patterns. The flag patterns look like a rectangle or parallelogram drawn by two parallel trend lines that tend to slope in the opposite direction of the prevailing trend. In an uptrend the flag pattern would have a slight downward slope. On the other hand, in a downtrend the flag pattern would have a slight upward slope.
The pennant is recognized be two converging trend lines. This pattern is horizontal and very narrowly depicts a small symmetrical triangle. Interestingly, both flags and pennants take less time period to form in down-trends, between one and two weeks. The steep price decline/ascent prior to the formation of the pattern should be on heavy volume. While pausing, the volume activity should drop off as the pattern begins to form. A spurt in volume is mandatory when the security breaks out of the pattern.
Both the patterns have similar measuring implication. The sharp up-move or down-move is called flagpole. These continuation patterns tend to emerge at about the halfway point of the move. The move after the breakout will duplicate the flagpole or the move prior to the pattern formation. That is, the vertical distance of the flagpole is measured and its target is calculated from the breakout point of the flag or pennant. The BSE Sensex represents two downward flag pattern during June and their targets had been met. Refer the charts below.
We notice a pennant pattern in Ingersoll-Rand (India)