Two types of continuation chart patterns often seen are flags and pennants. So reliable are they in delivering a trend continuation that they’re commonly known as half-mast patterns, with an equal amount of trend above and below the flag or pennant.

A flag is a partial retracement and consolidation, within a channel bracketed by parallel support and resistance boundaries that slant in the opposite direction to the underlying trend. The share price rises during an uptrend or falls in a downtrend, then retraces while investors consider the company’s current valuation and traders take profits off the table. During this consolidation, which generally lasts less than three trading weeks, volume tends to decline. Once it’s complete, the trend resumes.

A flag that’s high and tight forms only during a bull market. According to technical trader Tom Bulkowski, for this pattern variation the share price should rise at least 90% over the two months preceding the pause. The consolidation should be tight, with a narrow range, and accompanied by receding volume over a roughly two week time frame. Often the pattern formed doesn’t resemble a flag at all—it may be closer to a pennant or a triangle—but once the pattern confirms by surpassing the most recent swing high, fully 90% of high and tight flags reach the target price.

Finally, a pennant is shaped somewhere between a triangle and a flag, with symmetrically converging lines that aren’t quite as separated as most triangles. Again volume diminishes as the pattern forms, usually over a period of less than three weeks, before the share price resumes the trend.

For all three half-mast continuation patterns, it’s important to note that there must be something to continue. Flags and pennants are nothing without their flagpoles, and there’s no sense setting stop or limit orders on every rectangle or triangle that forms. Traders should watch for a true chart pattern and wait for it to confirm prior to entering the market, to reduce losses on false entries.

When last analysed, Minara Resources (MRE) was consolidating within a five-cent range between 0.75 and 0.80 as a descending triangle overwhelmed a partially-formed head and shoulders pattern. Such a tight range was guaranteed to break, and just five days after that analysis the share price rocketed above the resistance level, as shown on the chart, below:

The upside breakout was driven and confirmed by heavy volume, with an unfilled gap left between 0.905 and 0.915. Both the rise and the volume have cooled off quickly, however. Such a rapid move higher is likely to see an equally rapid retracement, at least sufficiently deep to fill in the gap. Although the surge higher wasn’t of sufficient distance to qualify for a high and tight flag, a pennant or regular flag formation could easily form.

Technical analysis by Craig Liles