Flags and Pennants

Flags and Pennants

Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move.

 

Sharp Move: To be considered a continuation pattern, there should be evidence of a prior trend. Flags and pennants require evidence of a sharp advance or decline on heavy volume. These moves usually occur on heavy volume and can contain gaps. This move usually represents the first leg of a significant advance or decline and the flag/pennant is merely a pause.

 

Flagpole: The flagpole is the distance from the first resistance or support break to the high or low of the flag/pennant. The sharp advance (or decline) that forms the flagpole should break a trend line or resistance/support level. A line extending up from this break to the high of the flag/pennant forms the flagpole.

 

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. Because flags are usually too short in duration to actually have reaction highs and reaction lows, the price action just needs to be contained within two parallel trend lines.

 

Pennant: A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone). The slope is usually neutral. Sometimes there will not be specific reaction highs and lows from which to draw the trend lines and the price action should just be contained within the converging trend lines.

 

Duration: Flags and pennants are short-term patterns that can last from 1 to 12 weeks. There is some debate on the timeframe and some consider 8 weeks to 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. A pennant more than 12 weeks old would turn into a symmetrical triangle. The reliability of patterns that fall between 8 and 12 weeks is debatable.

 

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 be heavy during the advance or decline that forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp move that creates the flagpole. An expansion of volume on the resistance (support) break lends credence to the validity of the formation and the likelihood of continuation.

 

Targets: The length of the flagpole can be applied to the resistance break or support break of the flag/pennant to estimate the advance or decline.

 

Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation and resumption to augment the robustness of pattern identification.

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Triple Bottom Reversal

 

Triple Bottom Reversal

The Triple Bottom Reversal is a bullish reversal pattern typically found on bar charts, line charts and candlestick charts. There are three equal lows followed by a break above resistance. As major reversal patterns, these patterns usually form over a 3- to 6-month period. Note that a Triple Bottom Reversal on a bar or line chart is completely different from Triple Bottom Breakdown on a P&F chart. Namely, Triple Bottom Breakouts on P&F charts are bearish patterns that mark a downside support break. We will first examine the individual parts of the pattern and then look at an example.

 

Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In the case of the Triple Bottom Reversal, a clear downtrend should precede the formation.

 

Three Lows: All three lows should be reasonably equal, well-spaced and mark significant turning points. The lows do not have to be exactly equal, but should be reasonably equivalent.

 

Volume: As the Triple Bottom Reversal develops, overall volume levels usually decline. Volume sometimes increases near the lows. After the third low, an expansion of volume on the advance and at the resistance breakout greatly reinforces the soundness of the pattern.

 

Resistance Break: As with many other reversal patterns, the Triple Bottom Reversal is not complete until a resistance breakout. The highest point of the formation, which would be the highest of the intermittent highs, marks resistance.

 

Resistance Turns Support: Broken resistance becomes potential support, and there is sometimes a test of this newfound support level with the first correction.

 

Price Target: The distance from the resistance breakout to lows can be measured and added to the resistance break for a price target. The longer the pattern develops, the more significant is the ultimate breakout. Triple Bottom Reversals that are 6 or more months in duration represent major bottoms and a price target is less likely to be effective.

 

As the Triple Bottom Reversal develops, it can start to resemble a number of patterns. Before the third low forms, the pattern may look like a Double Bottom Reversal. Three equal lows can also be found in a descending triangle or rectangle. Of these patterns mentioned, only the descending triangle has bearish overtones; the others are neutral until a breakout occurs. Similarly, the Triple Bottom Reversal should also be treated as a neutral pattern until a breakout occurs. The ability to hold support is bullish, but demand has not won the battle until resistance is broken. Volume on the last advance can sometimes yield a clue. If there is a sharp increase in volume and momentum, then the chances of a breakout increase.

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Triple Top Reversal pattern

Triple Top Reversal pattern

The Triple Top Reversal is a bearish reversal pattern typically found on bar charts, line charts and candlestick charts. There are three equal highs followed by a break below support. As major reversal patterns, these patterns usually form over a 3 to 6 month period. Note that a Triple Top Reversal on a bar or line chart is completely different from Triple Top Breakout on a P&F chart.. Namely, Triple Top Breakouts on P&F charts are bullish patterns that mark an upside resistance breakout. We will first examine the individual parts of the pattern and then look at an example.

Prior Trend: With any reversal pattern, there should be an existing trend to reverse. In the case of the Triple Top Reversal, an uptrend should precede the formation.

 

Three Highs: All three highs should be reasonably equal, well spaced and mark clear turning points to establish resistance. The highs do not have to be exactly equal, but should be reasonably equivalent to each other.

 

Volume: As the Triple Top Reversal develops, overall volume levels usually decline. Volume sometimes increases near the highs. After the third high, an expansion of volume on the subsequent decline and at the support break greatly reinforces the soundness of the pattern.

 

Support Break: As with many other reversal patterns, the Triple Top Reversal is not complete until a support break. The lowest point of the formation, which would be the lowest of the intermittent lows, marks this key support level.

 

Support Turns Resistance: Broken support becomes potential resistance, and there is sometimes a test of this newfound resistance level with a subsequent reaction rally.

 

Price Target: The distance from the support break to the highs can be measured and subtracted from the support break for a price target. The longer the pattern develops, the more significant the ultimate break. Triple Top Reversals that are 6 or more months old represent major tops and a price target is less likely to be effective.

 

Throughout the development of the Triple Top Reversal, it can start to resemble a number of other patterns. Before the third high forms, the pattern may look like a Double Top Reversal. Three equal highs can also be found in an ascending triangle or rectangle. Of these patterns mentioned, only the ascending triangle has bullish overtones; the others are neutral until a break occurs. In this same vein, the Triple Top Reversal should also be treated as a neutral pattern until a breakdown occurs. The inability to break above resistance is bearish, but the bears have not won the battle until support is broken. Volume on the last decline off resistance can sometimes yield a clue. If there is a sharp increase in volume and momentum, then the chances of a support break increase.

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