and unusually emotional. Because this pattern also represents an unusual amount of public participation, it most often occurs at major market tops. The expanding pattern, therefore, is usually a bearish formation. It generally appears near the end of a major bull market.
FLAGS AND PENNANTS
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. Figures 6.6a-b show what these two patterns look like. To begin with, notice the steep price advance preceding the formations on heavy volume. Notice 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 PennantsThe construction of the two patterns differs slightly. The flag resembles a parallelogram or rectangle marked by two parallel trendlines 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 trendlines 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 trendline in an uptrend. The breaking of the lower trendline would signal resumption of downtrends. The breaking of those trendlines should take place on heavier volume. As usual, upside volume is more critically important than down­side volume. (See Figures 6.7a-b.)
Measuring Implications
The measuring implications are similar for both patterns. Flags and pennants are said to "fly at half-mast" from a flagpole. The flagpole is the prior sharp advance or decline. The term "half-mast" suggests that these minor continuation patterns tend to appear at about the halfway point of the move. In general, the move after the trend has resumed will duplicate the flagpole or the move just prior to the formation of the pattern.
To be more precise, measure the distance of the preceding move from the original breakout point. That is to say, the point at which the original trend signal was given, either by the penetra­tion of a support or resistance level or an important trendline. That vertical distance of the preceding move is then measured from the breakout point of the flag or pennant—that is, the point at which the upper line is broken in an uptrend or the lower line in a downtrend.
SummaryLet's summarize the more important points of both patterns.1. They are both preceded by an almost straight line move (called a flagpole) on heavy volume.
2. Prices then pause for about one to three weeks on very light volume.
3. The trend resumes on a burst of trading activity.
4. Both patterns occur at about the midpoint of the market move.
5. The pennant resembles a small horizontal symmetrical tri­angle.
6. The flag resembles a small parallelogram that slopes against the prevailing trend.
7. Both patterns take less time to develop in downtrends.Both patterns are very common in the financial markets