Trend Continuation Patterns

Trend Continuation Patterns

Technical analysis provides charts that reinforce the current trends. These chart formations are

known as continuation patterns. They consist of fairly short consolidation periods. The breakouts

occur in the same direction as the original trend. The most important continuation patterns are:

1. Flags 2. Pennants. 3. Triangles.

4. Wedges. 5. Rectangles.

Flags. The flag formation provides signals for direction and price objective. This formation

represents a brief consolidation period within a solid and steep upward or downward trend. The

consolidation itself is bordered by a support line and a resistance line, which are parallel to each

other or very mildly converging, making it look like a flag (parallelogram) and tends to be sloped

in the opposite direction from the slope of the original trend, or is simply flat. The previous sharp

trend resembles a flagpole. If the original trend is going down, the formation is called a bearish

flag (See Figures 4.29 and 4.30). As Figure 4.29 shows, the original trend is sharply down. The

flagpole is measured between points A and B. The consolidation period occurs between the

support line ÂE and the resistance line ÑD. When the price penetrates the support line at point E,

the trend resumes its fall, with the price objective F, measured from E. The price target is of

about equal with the flagpole's length AB, measured from the breakout point through the support

line BE. Outgoing from prices in Figure 4.29, the height of the flagpole is measured as the

difference between 140.00 - 120.00 = 20.00. Once the support line is broken at 125.00, the price

target is 125.00 – 20.00 = 105.00.

Pennants. The pennants are closely related to the flags, so the same principles apply. The sole

difference is that the consolidation area better resembles a pennant, as the support and resistance

lines converge. If the original trend is bullish, then the chart pattern is a bullish pennant. In Figure

4.31, the pennant pole is AВ. С, В, and D frame the pennant-shaped consolidation. When the

market breaks through the resistance line ВD, the price objective is E. The amplitude of the target

price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts

from the breakout point. Outgoing from prices in Figure 4.31, the height of the pennant pole is

measured as the difference 1.5500 - 1.4500 = 1.1000. Once the resistance line is broken at

1.5200, the price target is 1.5200 +1.1000 = 1.6200.

If the original trend is going down, then the formation is a bearish pennant. In Figure 4.32, the

pennant pole is AÂ. С, В and D frame the pennant-shaped consolidation. When the market breaks

through the support line ÂD, the objective price is E. The amplitude of the target price is DE, and

it is equal to the pennant pole AB. The price target measurement starts from the breakout point.

Outgoing from prices in Figure 4.32, the height of the flagpole is measured as the difference

139.00 - 119.00 = 20.00. Once the support line is broken at 120.00, the price target is 120.00 –

20.00 = 100.00. A market example of a bearish pennant is presented on Figure 4.33.

Triangles. Triangles can be considered as pennants with no poles. There are four types of

triangles: symmetrical, ascending, descending, and expanding (broadening.) A symmetrical

triangle consists of two symmetrically converging support and resistance lines, defined by at least

four significant points (See Figures 4.34 and 4.35). The two symmetrically converging lines

suggest that there is a balance between supply and demand in the foreign exchange market.

Consequently, a break may occur on either side. Hence, in the case of a bullish symmetrical

triangle, the breakout will likely occur in the same direction, qualifying the formation as a

continuation pattern. As Figure 4.34 shows, the converging lines are symmetrical. Points B, D,

and F define the declining line. Points A, C, E, and G define the rising support line. The price

target is either equal to the width of the base of the triangle BB', measured from the breakout

point H (HH'); or at the intersection of line BI (which is a parallel line to the rising line AG) with

the price line. Trading volume will visibly decrease toward the end of the triangle, suggesting the

ambivalence of the market. The breakout is accompanied by a rise in volume. Outgoing from

prices in Figure 4.34, the price objective is either 1.5500, as the difference 1.5000 - 1.4000 =

0.1000 added to 1.4500; or 1.5300, as the difference between 1.5000 - 1.4000 = 0.1000, added to

1.4300. A currency market example is presented in Figure 4.35.

It consists of a flat support line and a downward sloping resistance line (See Figure 4.36). This

pattern suggests that supply is larger than demand. The currency is expected to break on the

downside. The descending triangle also provides a price objective. Measuring the width of the

triangle base and then transposing it to the breakpoint is used to calculate this objective. As

shown in Figure 4.36, the support line, defined by points A, C, E, and G, is flat. The converging

top line, defined by points B, D, F, and H, is sloped downward. The price objective is the width

of the base of the triangle (AA'), measured above the support line from the breakout point I (IF).

Outgoing from prices on Figure 4.36, the price objective is 1.3000, as the difference 1.5000 -

1.4000 = 0.1000 subtracted from 1.4000. Trading volume is decreasing steadily toward the tip of

the triangle, but increases rapidly on the breakout. The expanding (broadening) triangle, or the

megaphone, consists of a horizontal mirror image of a triangle, where the tip of the triangle is

next to the original trend, rather than its base (See Figure 4.37). Volume also follows the

horizontal mirror image switch and increases steadily as the chart formation develops. As shown

in Figure 4.37, the bottom support line, defined by points B, D, and F, and the top line, defined by

points A, C, and E, are divergent. The price objective should be the width, GG', of the base of the

triangle, measured from the breakout point G. Outgoing from prices on Figure 4.37, the price

objective is 102.00, as the difference between 101.00 - 100.00 = 1.00 subtracted from 101.00. A

real example of the megaphone is shown in Figure 4.38.

Wedges. The wedge formation is a close relative of the triangle and the pennant formations. It

resembles both the shape and the development time of the triangles, but it really looks and

behaves like a pennant without a pole. The wedge is markedly sloped, and the breakout occurs in

the direction opposite to its slope (See Figures 4.39 and 4.40), but similar to the direction of the

original trend. The signal we receive from the wedge formation is direction only. There is no

reliable price objective. Depending on the trend direction, there are falling and rising types of

wedges (as in Figure 4.39).

Rectangles . The rectangle formation reflects a consolidation period. Upon breakout, it is likely to

continue the original trend. Its failure will change it from a continuation to a reversal pattern. This

pattern is easy to spot, as it can be considered a minor side-ways trend. If it occurs within an uptrend

and the breakout occurs on the upside, it is called a bullish rectangle (See Figure 4.41). The

price objective is the height of the rectangle. As Figure 5.56 shows, the currency moves between

well-defined, flat support and resistance levels. A valid breakout may occur on either side from

this consolidation period. The price target (GH) is equal to the height of the rectangle (G'H);

measured from the breakout point H. Outgoing from prices in Figure 4.41, the price objective is

1.6200, as difference 1.6100 - 1.6000 = 0.0100, added to 1.6100. If the consolidation occurs

within a downtrend and the breakout continues the original trend, then it is called a bearish

rectangle (See Figure 4.42). As shown in Figure 4.42, the currency moves between well-defined,

flat support and resistance levels. A valid breakout may occur on either side of this consolidation

on period. The price objective (HG') is equal in size to the height of the rectangle (GH), measured

from the breakout point H. In the numerical example, the price objective is 100.00 (difference

102.00 - 101.00 = 1.00, subtracted from 101.00).

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