Flags and Pennants Chart Pattern

The flag and pennant formations are quite common. They are usually treated together because they are very similar in appearance, tend to show up at about the same place in an existing trend, and have the same volume and measuring criteria.

The flag and pennant represent brief pauses in a dynamic market move. In fact, one of the requirements for both the flag and the pennant is that they be preceded by a sharp and almost straight line move. They represent situations where a steep advance or decline has gotten ahead of itself, and where the market pauses briefly to "catch its breath" before running off again in the same direction.

Flags and pennants are among the most reliable of continuation patterns and only rarely produce a trend reversal. The steep price advance preceding the formations on heavy volume, also the dramatic drop off in activity as the consolidation patterns form and then the sudden burst of activity on the upside breakout.

Construction of Flags and Pennants

The construction of the two patterns differs slightly. The flag resembles a parallelogram or rectangle marked by two parallel trend lines that tend to slope against the prevailing trend. In a downtrend, the flag would have a slight upward slope.

The pennant is identified by two converging trend lines and is more horizontal. It very closely resembles a small symmetrical triangle. An important requirement is that volume should dry up noticeably while each of the patterns is forming.

Both patterns are relatively short term and should be completed within one to three weeks. Pennants and flags in down­trends tend to take even less time to develop, and often last no longer than one or two weeks. Both patterns are completed on the penetration of the upper trend line in an uptrend. The breaking of the lower trend line would signal resumption of downtrends. The breaking of those trend lines should take place on heavier volume. As usual, upside volume is more critically important than down­side volume.