Flags and Pennants are short-term continuation patterns that mark a small
consolidation before the previous move resumes. These patterns are usually
preceded by a sharp advance or decline with heavy volume, and mark a mid-point
of the move.
- Sharp Move: To be considered a continuation pattern, there should
be evidence of a prior trend. Flags and pennants require evidence of a sharp
advance or decline on heavy volume. These moves usually occur on heavy volume
and can contain gaps. This move usually represents the first leg of a
significant advance or decline and the flag/pennant is merely a pause.
- Flagpole: The flagpole is the distance from the first resistance or
support break to the high or low of the flag/pennant. The sharp advance (or
decline) that forms the flagpole should break a trendline or
resistance/support level. A line extending up from this break to the high of
the flag/pennant forms the flagpole.
- Flag: A flag is a small rectangle pattern that slopes against the
previous trend. If the previous move was up, then the flag would slope down.
If the move was down, then the flag would slope up. Because flags are usually
too short in duration to actually have reaction highs and lows, the price
action just needs to be contained within two parallel trendlines.
- Pennant: A pennant is a small symmetrical triangle that begins wide
and converges as the pattern matures (like a cone). The slope is usually
neutral. Sometimes there will not be specific reaction highs and lows from
which to draw the trendlines and the price action should just be contained
within the converging trendlines.
- Duration: Flags and pennants are short-term patterns that can last
from 1 to 12 weeks. There is some debate on the timeframe and some consider 8
weeks to be pushing the limits for a reliable pattern. Ideally, these patterns
will form between 1 and 4 weeks. Once a flag becomes more than 12 weeks old,
it would be classified as a rectangle. A pennant more than 12 weeks old would
turn into a symmetrical triangle. The reliability of patterns that fall
between 8 and 12 weeks is debatable.
- Break: For a bullish flag or pennant, a break above resistance
signals that the previous advance has resumed. For a bearish flag or pennant,
a break below support signals that the previous decline has resumed.
- Volume: Volume should be heavy during the advance or decline that
forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp
move that creates the flagpole. An expansion of volume on the resistance
(support) break lends credence to the validity of the formation and the
likelihood of continuation.
- Targets: The length of the flagpole can be applied to the
resistance break or support break of the flag/pennant to estimate the advance
Even though flags and pennants are common formations, identification
guidelines should not be taken lightly. It is important that flags and pennants
are preceded by a sharp advance or decline. Without a sharp move, the
reliability of the formation becomes questionable and trading could carry added
risk. Look for volume confirmation on the initial move, consolidation and
resumption to augment the robustness of pattern identification.
HWP provides an example of a flag that forms after a sharp and sudden
- Sharp move: After consolidating for three months, HWP broke above
resistance at 28 to begin a sharp advance. The 5-April high and 16-Feb
trendline marked resistance and the breakout occurred with a volume expansion.
The stock advanced from 28 to 38 in a mere 4 weeks. (Note: It is also possible
that a small pennant formed in early May with resistance around 31).
- Flagpole: The distance from the breakout at 28 to the flag's high
at 38 formed the flagpole.
- Flag: Price action was contained within two parallel trendlines
that sloped down.
- Duration: From a high at 38 to the breakout at 36, the flag formed
over a 23-day period.
- Breakout: The first break above the flag's upper trendline occurred
on 21-June without an expansion of volume. However, the stock gapped up a week
later and closed strong with above-average volume (red arrows)
- Volume: To recap -- volume expanded on the sharp advance to form
the flagpole, contracted during the flag's formation and expanded right after
the resistance breakout.
- Targets: The length of the flagpole measured 20 points and was
applied to the resistance breakout at 36 to project a target of 46.