Continuation patterns indicate a pause in trend, implying that the previous direction will resume after a period of time. We will look at the following patterns: price channels, symmetrical triangles and flags & pennants.
A price channel is a continuation pattern that is bound by a trend line and a return line. A price channel may slope up (ascending pattern), down (descending pattern) or not at all (rectangle pattern). Depending on the channel slope, each of the lines can serve as either support or resistance.
+ An ascending price channel is considered bullish. Traders will look to buy when prices reach the trend line support and take profit when it reaches the return line resistance.
+ Descending price channel is considered bearish. Traders will look to sell when prices reach the trend line resistance and take profit when it reaches the return line support.
+ Rectangle patterns are neither bullish nor bearish, but simply reflect a pause in the underlying trend.
To draw a bullish price channel it is necessary to have at least two higher-lows and two parallel, or higher-highs. Conversely, to draw a bearish price channel, two lower-highs and parallel, or lower-lows are necessary.
Although channels are usually referred to as continuation patterns, there are exceptions when a reversal trend might occur. In those cases prices usually fail to touch the return line before falling in what can be an early sign for an impending reversal.
Channels also have quantitative implications. Once price action breaks through the channel line, prices usually travel a distance equal to at least the width of the channel.
Because technical analysis is just as much art as it is science, there is room for flexibility. Even though exact trendline touches are ideal it is up to each individual to judge the relevance and placement of both the main trendline and the channel line. By the same token, a channel line that is exactly parallel to the main trendline is ideal.
The symmetrical triangle is a continuation pattern that developed in markets that seems aimless in direction. The pattern contains at least two lower-highs and two higher-lows that seem to come together. When the lines connecting these points are extended, they converge and a symmetrical triangle results.
The symmetrical triangle has both measuring and timing implications. As the pattern is completed, price and volume diminishes before they both react sharply to break out of the triangle's boundaries. When the breakout occurs, prices tend to travel a distance equal to the triangle's base or more (see the example below). From the timing perspective, the breach of a triangle should occur somewhere between half-way and two thirds along the distance from base to apex, i.e. the triangle's height.
The break may occur on either side out of the triangle. In the case of a bullish symmetrical triangle, the breakout occurs in the same direction of the previous bullish trend. In the case of a bearish symmetrical triangle, the breakout occurs in the same direction of the previous bearish trend.
Example of a bullish symmetrical triangle
Flags and Pennants
These two similar continuation patterns usually occur at the midpoint of a large price movement and represent only brief pauses in a dynamic market. They can be identified and distinguished by the shape of their "body;" a rectangle sloping slightly against the trend in the case of the flag, and a triangle in the case of the pennant.
Flags and pennants are similar in both their form and interpretation. Both mark a small consolidation of a price movement, though to be truly considered as continuation patterns there should be evidence of a prior trend.
Flags and pennants are usually preceded by a sharp advance or decline in the direction of the trend, which provides the shape of the "flagpole" on the chart. The breakout from the pattern should show a minimal price move equal to the length of the flagpole.
Example of a Bullish Flag : When a breakout occurs, the minimal price move is equal to the size of the flagpole.