So far, we have looked at patterns that have a general upward trend but this is the first looking at downward trends. After a quick, strong decline, here you would see numerous days with a sideways movement with a weaker volume. Then, a second sharp decline would follow and new lows would be met with a strong volume. By taking the breakout level and subtracting the total height for the flagpole, you can figure out the technical target.
When assessing, it can be hard to put one pattern into a certain set of guidelines so this must be done carefully. Of course, pennants and flags come after a sharp movement either upwards or downwards but there is no real reliability without a sharp movement either way. When trading, this makes it hard to judge and the risk is multiplied. Instead, look for the initial move and volume confirmation.
As a representation of a brief pause in stock, both pennants and flags are considered continuation patterns and they are normally found after a fast, big move. After, the stock then normally follows in the same direction as before. As far as patterns go, these are some of the most reliable. With higher tops and bottoms, bearish flags generally slope against the trend and run parallel to each other.
Sharp Move - There needs to be evidence of a previous trend ief it is to be considered a continuation pattern as well as the fact that pennants and flags need previous evidence of decline or advance on strong volume. Normally, the flag or pennant is merely seen as a pause after this move shows the first leg of a big decline or advance.
Pennant - Beginning wide and soon converging the more the pattern matures, a pennant is a small symmetrical triangle. Often, the neutral slope means that reaction lows and highs don't always occur which means that the price action is contained within the converging trend lines.
Flag - Sloping against the previous trend, a flag is a rectangle pattern. When the previous move was up, the flag will slope downwards and vice versa. Normally, the price action will have to be contained between the two parallel trend lines because the flags are too short to have reaction lows and highs.
Flagpole - Measuring from the high or low of the flag or pennant to the first resistance or support break, this is called the flagpole. The decline or advance that helps to form the flagpole should then break a trend line or support/resistance level.
Duration - Although the patterns generally last for up to twelve weeks, they all ideally form in the first four. As soon as the twelve week mark is passed, a flag will be classified as a rectangle whilst a pennant would classify as a symmetrical triangle. Despite the twelve week life, some experts question the reliability after eight.
Break - When it comes to bearish pennants or flags, previous declines will have resumed after a break below the resistance levels. For a bullish pennant or flag, previous advances will have resumed after a break above the resistance levels.
Targets - In order to estimate the decline or advance, the total length of the flagpole needs to be applied to the support or resistance break.
Volume - During the decline or advance that first forms the flagpole, volume should be heavy as this provides legitimacy for the shape movements that create the flagpole. When the volume expands on the support/resistance break, it increases the likelihood of continuation.