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When sideways price motion occurs amid a quick runup or decline, the trading range many times will adopt the form of a flag or a pennant. It is as if the sideways movement is waving off the end of a flagpole drawn by the rapid increase or decrease in price (Figure 2).

The lines connecting the tops and bottoms of a flag or pennant need not be horizontal like a trading range. These formations may tilt up or down. A flag's lines, however, are always close to parallel, while a pennant's lines converge.

Because both formations result typically from quick price movements, they appear mostly on daily charts. It is rare to see a flag or pennant on weekly charts. The beauty of flag and pennant formations is that they usually mark the halfway point of a continuing price move. A pennant, in particular, is most often seen in the last phase of bull markets or bear markets.

Typically, volume is extremely heavy before the flag or pennant appears and then backs off as the formation starts waving. This is an important clue about the trend. The volume surging in the direction of the trend confirms the underlying strength or weakness. The market then pauses on minor profit-taking (forming the flag or pennant) on light volume, and then when the price breaks out of the formation, the volume explodes. At this point, a trader can expect price to repeat the distance it traveled prior to the flag or pennant.

HEAD AND SHOULDERS

Head and shoulders are normally thought of as reversal patterns. The top or bottom reversal traditionally points in the direction of the original trend. Occasionally, however, when a head-and-shoulders formation flips and points in the direction opposite of the trend, it is a continuation pattern (Figures 3 and 4). For instance, when prices are moving up, the head and shoulders formation hangs upside down, representing a reaccumulation phase. Strong buyers are entering the market and accumulating positions in expectation of a continuation of the original trend.

During a bear market, the head and shoulders pattern represents a redistribution pattern (Figure 4).

Unfortunately, the typically used price objectives of the head and shoulders pattern no longer hold up when it strikes the continuation pose. Price predictions are not reliable, and volume decreases from the left shoulder to the right. On breakout, volume can be expected to be relatively heavy, confirming the trend.

During a bear market, the head and shoulders pattern represents a redistribution pattern (Figure 4). During this phase, the large players use the higher prices that occur during the countertrend move to sell holdings and position for a continuation of the downtrend. Although price objectives are not reliable in this mode, the formation serves as a good indicator that a reversal is not in the works.

SYMMETRICAL TRIANGLES

Unlike the pennants that occur during sharp daily moves, the symmetrical triangle appears regularly on charts of all time periods (Figure 5). As a bonus, it can be used to predict how far prices will continue after breaking out of the formation.

Narrowing prices create the arrowhead shape of the symmetrical triangle, but unlike the implications of its name, the two sides of the triangle need not be at the same angle. It is only necessary that the two sides of the triangle slant to distinguish it from reversal triangles that have one horizontal side.

As prices head toward the tip of the arrowhead, volume tends to diminish, evidence that the market is resting after the latest trend was completed. A trader expects price to break out of the formation about two thirds of the way to the tip, and with increased volume if the original trend was to the upside. Volume on a downside breakout is usually light and picks up after a few days. As with reversal triangles, the symmetrical triangle loses its significance if price exits through the tip of the arrowhead. A true breakout is a closing price beyond either slanted line at a distance equal to at least 5% of the greatest price distance within the formation.