Trend Patterns

Flags/Pennants/Triangles

Flags, pennants and triangles are variations of consolidation that usually occurs in the middle of major moves, before the trend reasserts itself. The market pauses because of profit-taking and the volume generally declines. The difference between these three types is the shape.

A flag consists of two parallel support and resistance lines generally slanting in the opposite direction to the trend, but not always. The market corrects temporarily within a range counter to the overlying trend, before breaking back out.

A pennant is the same as a flag, but one of the support levels is horizontal. The price bounces of a fixed support line level at one side and makes lower highs or higher lows at the opposite side. With this pattern, a rule of thumb is to expect a breakout around 2/3 of the length of the channel. This is because the closer the price moves toward the end of the pennant, the narrower the trading range and the more likely it is for a breakout to occur.

The example below is for OIL in 2008.

Triangles are very similar to pennants, except both support and resistance lines are closing in together. The 2/3 rule generally holds here as well for the same principles. The example below shows GOLD in 2007. As you can see, a triangle forms where the support and resistance levels converge and the market trades in a narrower and narrower range. Once the market breaks out at the $800 level, it quickly moves all the way up to $910 before a correction. In this case the market also forms a pennant later in the move, which breaks out up to $1000.

These patterns all work best when they are tight, fast and neat. Again, you need to wary of false breakouts if you are going to trade these. Generally a breakout from a flag or pennant will also lead to a breakout of the Bollinger bands for our trading strategy too (more in this in later guides).

Triangles, flags and pennants can be all be traded the same way as a breakout from consolidation.