Technial Analysis – Trend Continuation Patterns

Trend Continuation Patterns

Technical analysis provides charts that reinforce the current trends. These chart formations are known as continuation patterns. They consist of fairly short consolidation periods. The breakouts occur in the same direction as the original trend.

The most important continuation patterns are:

  1. Flags
  2. Pennants
  3. Triangles
  4. Wedges
  5. Rectangles

Flag formation

The flag formation provides signals for direction and price objective.

This formation represents a brief consolidation period within a solid and steep upward or downward trend. The consolidation itself is bordered by a support line and a resistance line, which are parallel to each other or very mildly converging, making it look like a flag (parallelogram) and tends to be sloped in the opposite direction from the slope of the original trend, or is simply flat.

The previous sharp trend is resembles a flagpole.

If the original trend is going down, the formation is called a bearish flag. (See Figure 5.22.) As Figure 5.22. shows, the original trend is sharply down. The flagpole is measured between points A and B. The consolidation period occurs between the support line B to E and the resistance line C to D. When the price penetrates the support line at point E, the trend resumes its fall, with the price objective F, measured from E. The price target is of about equal amplitude with the flagpole’s length (A to B), measured from the breakout point through the support line (B to E.)

In the numerical example, the height of the flagpole is measured as the difference between 140.00 and 120.00 equals 2000 pips. Once the support line is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.

Pennant Formation

The pennants are closely related to the flags. The same principles apply.

The sole difference is that the consolidation area better resembles a pennant, as the support and resistance lines converge. If the original trend is bullish, then the chart pattern is a bullish pennant. In Figure 5.23., the pennant pole is A to B The pennant-shaped consolidation is framed by C, B, and D. When the market breaks through the resistance line B to D, the price objective is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B.

The price target measurement starts from the breakout point.

 

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Figure 5.22. Diagram of a bear flag formation

In the numerical example, the height of the pennant pole is measured as the difference between 1.5500 and 1.4500, or 1000 pips. Once the resistance line is broken at 1.5200, the price target is 1.6200, as 1000 pips from 1.5200.

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Figure 5.23. Diagram of a bullish pennant.

If the original trend is going down, then the formation is a bearish pennant. In Figure 5.24., the pennant pole is A to B. The pennant-shaped consolidation is framed by C, B and D. When the market breaks through the support line B to D, the objective price is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point.
In the numerical example, the height of the flagpole is measured as the difference between 139.00 and 119.00, or 2000 pips. Once the support line is broken at 120.00, the price target is 100.00, as 2000 pips from 120.00.

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Figure 5.24. Diagram of a bearish pennant

Triangle Formation

Triangles can be visualized as pennants with no poles. There are four types of triangles: symmetrical, ascending, descending, and expanding (broadening).

A symmetrical triangle consists of two symmetrically converging support and resistance lines, defined by at least four significant points. (See Figure 5.25.) The two symmetrically converging lines suggest that there is a balance between supply and demand in the foreign exchange market. Consequently, a break may occur on either side. In the case of a bullish symmetrical triangle, the breakout will occur in the same direction, qualifying the formation as a continuation pattern.

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Figure 5.25. A market example of a bearish pennant

is defined by points B, D, and F. The rising support line is defined by points A, C, E, and G. The price target is either (1) equal to the width of the base of the triangle BB’, measured from the breakout point H (HH’); or (2) at the intersection of line BI (which is a parallel line to the rising line AG) with the price line.
Trading volume will visibly decrease toward the end of the triangle, suggesting the ambivalence of the market. The breakout is accompanied by a rise in volume.
In the numerical example, the price objective is either 1.5500, as the difference between 1.5000 and 1.4000, measured from 1.4500 or 1.5300, as the difference between 1.5000 and 1.4000, measured from 1.4300.

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Figure 5.26. Diagram of a bullish symmetrical triangle

The ascending triangle consists of flat resistance line and a rising support line. (See Figure 5.27.) The formation suggests that demand is stronger than supply. The breakout should occur on the upside, and it consists of the width of the base of the triangle as measured from the breakout point. As you can see in Figure 5.28., the resistance line defined by points A, C, and E is flat. The converging bottom line, defined by points B, D, and F, is sloped upward. The price objective is the with of the base of the triangle (AA’) measured above the resistance line from the breakout point G (GG’.) In the numerical example, the price objective is 106.00, as the 200-pip difference between 105.00 and 103.00, measured from 104.00.

Trading volume is decreasing steadily toward the tip of the triangle, but increases rapidly on the breakout.

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Figure 5.27. An example of a symmetrical triangle

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Figure 5.28. Diagram of typical ascending triangle

The descending triangle is simply a mirror image of the ascending triangle. It consists of a flat support line and a downward sloping resistance line. (See Figure 5.29.) This pattern suggests that supply is larger than demand. The currency is expected to break on the downside. The descending triangle also provides a price objective. This objective is calculated by measuring the width of the triangle base and then transposing it to the breakpoint. As shown in Figure 5.29., the support line, defined by points A, C, E, and G, is flat. The converging top line, defined by points B, D, F, and H, is sloped downward. The price objective is the width of the base of the triangle (AA’), measured above the support line from the breakout point I (IF.)

In the numerical example, the price objective is 1.3000, as the 1000-pip difference between 1.5000 and 1.4000, measured from 1.4000.

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Figure 5.29. Diagram of a descending triangle

Trading volume is decreasing steadily toward the tip of the triangle, but increases rapidly on the breakout.
The expanding (broadening) triangle consists of a horizontal mirror image of a triangle, where the tip of the triangle is next to the original trend, rather than its base. (See Figure 5.30.) Volume also follows the horizontal mirror image switch and increases steadily as the chart formation develops. As shown in Figure 5.30, the bottom support line, defined by points B, D, and F, and the top line, defined by points A, C, and E, are divergent. The price objective should be the width, GG’, of the base of the triangle, measured from the breakout point G.
In the numerical example, the price objective is 102.00, as the 100-pip difference between 101.00 and 100.00, measured from 101.00.

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Figure 5.30. Diagram of an expanding triangle

Wedge Formation

The wedge formation is a close relative of the triangle and the pennant formations. It resembles both the shape and the development time of the triangles, but it really looks and behaves like a pennant without a pole. The wedge is markedly sloped, and the breakout occurs in the direction opposite to its slope (see Figure 5.31.), but similar to the direction of the original trend. The signal we receive from the wedge formation is direction only. There is no reliable price objective. Depending on the trend direction, there are two types of wedges: falling (see Figure 5.31.) and rising.

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Figure 5.31. Diagram of a falling wedge

Rectangle Formation

Also known as a trading range (or congestion), the rectangle formation reflects a consolidation period. Upon breakout, it is likely to continue the original trend. Its failure will change it from a continuation to a reversal pattern. This pattern is easy to spot, as it can be considered a minor side-ways trend. If it occurs within an uptrend and the breakout occurs on the upside, it is called a bullish rectangle. (See Figure 5.32.) The price objective is the height of the rectangle. As Figure 5.32. shows, the currency moves between welldefined, flat support and resistance levels. A valid breakout may occur on either side from this consolidation period. The price target (GH) is equal to the height of the rectangle (G’H), measured from the breakout point H. In the numerical example, the price objective is 1.6200, as the 100-pip difference between 1.6100 and 1.6000, measured from 1.6100.

If the consolidation occurs within a downtrend and the breakout continues the original trend, then it is called a bearish rectangle. (See Figure 5.33.) As shown in Figure 5.33., the currency moves between well-defined, flat support and resistance levels. A valid breakout may occur on either side of this consolidation period. The price objective (HG’) is equal in size to the height of the rectangle (GH), measured from the breakout point H. In the numerical example, the price objective is 100.00, as the 100-pip difference between 102.00 and 101.00, measured from 101.00.

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Figure 5.32. Diagram of a typical bullish rectangle

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Figure 5.33. Diagram of a typical bearish rectangle

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