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Last week, we discussed how price action can form into a constricting pattern that resembles a triangle or wedge at turning points in the market. I hope that you gathered that sometimes the shape of these patterns leads on to a prediction that, instead of a turn, prices could break out of the triangle pattern and continue in the direction they were travelling in prior to forming the pattern. This is most usually seen when the triangle in question is symmetrical or where it is a right angle triangle, the horizontal side of which provides either resistance (in the case of an upward sloping triangle) or support (in the case of a downward sloping triangle). So triangles can be turning point indicators or they can be continuation patterns, but either way they give a clue as to the likely size of the move following the breakout. Triangles typically form over several weeks, months or longer.

However, there are shorter term patterns that form over days or a few weeks (rarely longer) but which are no less valuable and indeed can often be better indicators of the eventual ultimate resting point of a market. Typically they are referred to as pennants and flags. Pennants exhibit progressive congestion and are very similar to triangles in their shape though of course they are much smaller, while flags look just like their name suggests (imagine a flag fluttering at the top of a pole in the light breeze and you will get the idea). To be truly accurate, a flag is a small parallelogram of price action that usually slopes against the prevailing trend. Both these formations are associated with marking the halfway point in a move (they fly at half-mast) and as such can give a good target for the expected move once prices resume the trend by extending the move that occurred prior to they forming from their breakout point to arrive at a target level. Think of them as the market taking a pause for breath midway in its move and you will begin to see their value to the trader.