The Trend

Chart Patterns: Flags and Pennants

Traders are often told to ignore technical analysis. “Technical analysis is fundamentally flawed,” says Forbes. “Technical analysis is stupid,” blared The Motley Fool.

“The poor reputation of technical analysis is well deserved. It’s their own fault really,” commented Following the Trend.

But it’s just not true. In fact, technical analysis is just as important as fundamental analysis because it helps us understand the psychology of traders driving the stock.

As a matter of fact, once you begin to understand that along with pattern recognition, the better your chances for making good money along the way. We’re already discussed some of the most powerful and most used patterns, but there are – quite literally – more than a hundred or so more. Here are two more to know now.

The Bull and Bear Flag

A flag pattern can show up in the middle of a trend and often give you another opportunity to buy. Typically, a flag will show up when the price of a stock moves up (bull) or down (bear) in a strong trend, but then pauses.

The price of the stock will then trade sideways in a narrow, sometimes sloping range. Drawn trend lines will represent support and resistance, as the stock is narrowing will form a rectangular shape – much with the look of a flag.

Eventually, the price will break out of the flag pattern and continue the original paused trend. However, as with any other technical pattern, there’s no such thing as a perfect indicator. That being the case always be sure to confirm your findings and wait for confirmation of potential trend change.

With the flag pattern, we have a bull and a bear flag.

The bullish flag pattern resembles a flag on a pole. The pole is a result of a vertical rise in the stock with the flag resulting from a period of consolidation. 

We can see this briefly in Inc. (JD), for example.

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With a bearish flag, you’ll find these in a down trending stock.  The pattern looks like an inverted flag on a pole followed by a period of consolidation.

Here’s an example using Starbucks (SBUX) in 2007.

The Pennant Formation

This setup looks like a symmetrical triangle, where support and resistance lines begin to converge towards one another.  It’s viewed as a continuation pattern.  For example, we can see it briefly in this chart of the Dow Jones Industrial Average.

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