Continuation Stock Patterns

For those of you that read the last document, Oversold Stock Patterns, let me warn you, Continuation
Patterns are a bit more involved.

As with the last one, this is meant to serve only as a basic overview, a primer if you will, into the realm of
Continuation Patterns. There is much more to be discovered on this topic than will be covered in this
document, but if youve ever asked yourself, What are they talking about? when the discussion turns
to Continuations, you should find the general concept here. So, without further ado, here we go!

Continuation Patterns in technical stock chart analysis, are interesting. The name itself is a written
contradiction of sorts, for the indicators are not a continuation at all! They are deviation. Confused yet?
Hang on. But they do indicate that the previous will likely continue or not. Stand by, well sort this all
out for you.

The name comes from the fact that after the deviation, which is what we will be reviewing, the previous
trend will continue. The focus here will be those deviations, so you will be able to recognize them and
know what they mean. Think of this as a road trip, you are driving along the highway, headed towards
your destination, and you stop to rest and take in the scenery. Then, after you have enjoyed the view,
you get back on the road and continue your journey. Same thing applies here. The road is your trend,
and when you detour to look at scenery, you have your eye on profit. The patterns well talk about
below, are your detours.

There are exceptions to every rule, and in some cases, the pattern will indicate a likely reversal. But fear
not, we will touch on those as well. In this document, we are going to cover four basic Continuation
Patterns; Triangles, Wedges, Flags, and Pennants, . There are more patterns then that involved in
technical chart analysis, but this is just an entry point to knowledge, so we will stick to the four basics.
Triangles:

Triangles are a common continuation pattern. This pattern, like most continuation patterns, tend to be
more accurate when the trend had been prolonged, perhaps over 1-3 months. Triangles must consist of
2 or more peak and valley pairs. To further delve in, there are 3 different types of triangles;
symmetrical, ascending, and descending.

Symmetrical Triangles are an indication of consolidation. As the pattern continues, you will typically a
decrease in trading volume. After completion of the pattern, the breakout will usually occur in the
direction of the initial trend before the pattern began, with an associated increase in volume.
Confirmation of the move is generally regarded as a two candlestick move beyond the triangle trendline.
Ascending Triangles are another Continuation Pattern signal, that signal consolidation during an
uptrend, and they usually are a bullish signal. These triangles, are much like the symmetrical triangle,
except the top line remains horizontal, (or in some cases slightly downwards), while the bottom line
moves up to meet it. From a practical perspective, what is occurring is that the bulls and bears are
battle, but the bulls are winning. This is reflected in the fact that the bears cannot maintain a low
bottom, the bottom is trending upwards towards the high. Once the bears have lost the battle, the
breakout occurs. As with the symmetrical triangle, volume will diminish as the triangle progresses,
followed by an increase in volume at breakout. Also, the preceding trend should be a few months long,
and at least two peaks and valleys are required to constitute the pattern. It is important to note that the
top line remains flat. Do not get the triangles confused with wedges, but we will get there.
Descending Triangles are the opposite of the ascending triangle above. The bottom remains flat, and
the top trend line comes down. It is the same battle as before, except that bears are now winning. And
when the battle is over, the bears will have won, (usually), and the price will drop. All the same criteria
apply regarding time frame, peaks and valleys, and volume.
Wedges:

Wedges are broken into two types, ascending and descending. Please note, that while wedges and
triangles are similar in appearance, there are some important differences. Triangles have symmetrical
converging lines, or have horizontal tops (ascending), or horizontal bottoms (descending). Whereas
Wedges have two trendlines that are moving in the same direction, either up or down. But one of these
lines is rising faster than the other (in the case of an ascending wedge), or falling faster than the other
(in the case of s descending wedge). It is also noteworthy to point out that the technical implications of
these patterns differ. Ascending Triangles and Descending Wedges are generally considered bullish
patterns, where Descending Triangles and Ascending Wedges are generally considered bearish.

Ascending Wedges is considered a bearish signal. This pattern is indicated by the bottom trend line
rising faster than the top trend line. This indicates that the bears are gaining momentum at a faster rate
than the bulls are, and since the overall trend is upwards, the price will likely reverse.
Descending Wedges are considered a bullish signal. This pattern is characterized by the top trend line
falling faster than the bottom trend line. This is a sign that the bulls are gaining momentum over the
bears and the price will break out in an upwards direction.

One important point to note with both triangle and wedge patterns is, when the break out occurs, the
price will commonly rise by an amount equivalent to the value of the base of the angle. CHMA is a good
example of this.
Flags and Pennants:

Flags and Pennant patterns are very closely related, as therefore, we will discuss them together here.
They are both, generally short-term patterns, lasting usually less than a month, but they can prolong.
They also both will tend to form quicker during a downtrend than they will during an uptrend. The most
significant attribute of both of these patterns is that they are the most reliable of all the continuation
patterns, and will rarely result in a price reversal. Therefore, it is important to identify the preceding
trend. If the trend was upwards before the continuation pattern, it will most likely continue upwards
after the pattern completes. Both of these patterns signify a period of consolidation have a large price
movement.

These patterns are set up with a sharp price movement, either up or down, with accompanying high
volume. This sharp movement, should break a resistance (upwards) level, or a support (downwards)
level, before beginning its sideways movement. This movement creates the Flagpole. During the Flag or
Pennant, you should observe a fall-off in volume. Once the pattern completes, a price target equal to
the height of the original flag pole can be anticipated, with a breakout associated rise in volume.

Flags are parallelograms that will generally slope away from the original price movement. Therefore, if
the sharp movement was upwards, the flag will generally slope down before breaking out and
continuing the original movement upwards.
Pennants look like small symmetrical triangles, and are general horizontal in direction. Although, the
look like triangles, they need not follow the rules of triangles as far as several points needing to touch
the trend lines to confirm the pattern. The price just needs to be contained within the converging
trendlines.

I hope this short summary of basic continuation patterns will serve as a catalyst for you to desire to
learn more. There are more patterns than those covered above, but this brief document should give
you a solid foundation to build upon.