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Flag, Pennant & Rectangle
Flags and pennants
A pennant is a small triangle whose lines are slanted in the same direction. Pennants that slant the
trend serve as continuation patterns. There is an old saying "The pennant flies at half-mast" - a rally is likely to travel as far the
pennant as it did before. A pennant that slants i the direction of the trend indicates exhaustion - a trend is nearing a reversal.
A Flag is a rectangle whose boundaries are parallel but slant up or down. Breakouts tend to go against the slope of
the flag. If a flag slants upward, a downside breakout is more likely. If the flag slants down, an upside breakout is more likely.
If you see a downsloping flag in an uptrend, place a buy order above the latest peak of the flag to catch an upside breakout.
A rising flag in an uptrend marks distribution ,and a downstide breakout is more likely. Place an order to sell short below the latest
low of that flag. Reverse th eprocedure in downtrends.
Rectangle
A rectangle is a chart pattern that contains price movement between two parallel lines.You need four points to draw
a rectangle: The upper lines connects two rally tops, and the lower line connects two bottoms. These lines should be drawn through the
edges of congestion areas rather than across the extreme hight and lows. The upper line of a rectangle identifies resistance, while the
lower line identifies support. The upper lines shows where bull run out of steam; the lower line shows where bears become exhausted. A
rectangle shows that bulls and bears are evenly matched.
If the volume swells when price approach the upper border of a rectangle, an
upside breakout is more likely. If volume increases when prices approach the lower border, a downside breakout is more likely. A valid
breakout from a rectangle is usually confirmed by an increase in volume. If volume is thin, it is likely to be a false breakout. Rectangles
trend to be wider in uptrends and narrower in downtrends. The longer a rectangle, the more significant a breakout. Breakout from rectangles
on weekly charts are especially important because they mark important victories from bulls or bears.
To project how far a breakout is likely to go, measure the height of a rectangle and project it from the broken
wall in the direction of the breakout. This is the minumum target. The maximun target is obtained by taking the lenght of the rectangle
and project it vertically from the broken wall in the direction of a breakout.
 NEXT Reversal Patterns
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