1. 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.
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2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. Targets: The length of the flagpole can be applied to the resistance break or support break of the
flag/pennant to estimate the advance or decline.
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