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Continuation Patterns

In technical analysis, identifying continuation patterns within an assets movement is an important part of the investment decision making process. They signify a break or disruption in the trend, which usually implies that the previous market direction will restart again after an unspecified time period. The three main continuation patterns are:

Price Channels
Symmetrical Triangles
Flags and Pennants

Price Channels

A Price Channel is a commonly used continuation pattern that goes up and down, tied in to an upper and lower trend line. The upper trend line designates resistance whilst the lower trend line designates support.

When a price channel slopes upwards it is called an ascending pattern and is considered Bullish. Adversely, when a price channel slopes downwards it is called a descending pattern and is considered Bearish. Both the upward and downward lines can act as a line in both support and resistance.

In order to be able to draw an ascending price channel, there needs to be at least two higher-lows and two higher-highs (parallels). Whilst to be able to draw a descending price channel there needs to be two lower-highs and two lower-lows.

It is possible to use Price Channels to identify upward movements that indicate the beginning of an uptrend or downward drops that identify the beginning of a downtrend. You can also use Price Channels to recognize overbought and oversold levels within a larger downtrend or uptrend.

Symmetrical Triangles

A symmetrical triangle, sometimes referred to as a coil is a pattern formed on a chart containing at least two lower-highs and two higher-lows that converge together.

The symmetrical triangle contains timing and measuring implications. Once the pattern has finished, volume and price reduces prior to them both reacting strongly to break out of the boundaries of the triangle. Once breakout happens, the prices generally travel a distance the equivalent to the base of the triangle or more. With regards to the timing perspective, the breaking out of the triangle should happen somewhere between the mid-point and two-thirds along the distance from the base to the apex (the height of the triangle)

The breakout can happen on either side out of the triangle. For the bullish symmetrical triangle showing an upward trend, the breaching happens in the same direction as the previous bullish trend. Conversely, with a bearish symmetrical triangle, the breakout happens in the same direction as the previous bearish trend.

Flags & Pennants

Flags and Pennants is a term used to describe two very alike continuation patterns occurring at the halfway point of a big price fluctuation and represents only momentary breaks in a volatile and dynamic market. Identifying flags and pennants can be achieved by the shape of their ‘body’; for a flag this is a rectangle sloping marginally against the trend, whilst for a pennant it is in the form of a pennant.

The two are very similar in their shape and in their interpretation and chart a small consolidation of a movement within the price of an asset. However, for it to be considered as a true continuation pattern, there needs to be proof of a previous trend.

Before the occurrence of a flag and pennant in a chart there is a either a sharp increase or decrease in the trend’s direction. This gives the form of the ‘flagpole’ within the chart. The breaching of the pattern would display a minimal price move the same length of the flagpole.

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