Continuation Chart Patterns: Stock Market
A continuation chart pattern, commonly referenced in technical analysis, is a pattern that forms within a trend that generally signals a trend continuation. In contrast to reversal patterns, continuation patterns signal a temporary consolidation in the middle of a trend.
Usually, these are also known as consolidation patterns because they show how buyers or sellers take a quick break before moving further in the same direction as the prior trend.
This pause is known as a ‘‘consolidation.’’ On many occasions, these consolidations form specific shapes and patterns known as ‘‘continuation patterns.’’
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| Continuation Chart Pattern |
Key Take away
- Continuation patterns are an indication traders look for to signal that a price trend is likely to remain in play.
- These patterns occur in the middle of a trend and signal that once a pattern has completed, the trend will most likely resume.
- All kinds of time frames can be scoured for continuation patterns, such as tick charts, daily or weekly charts.
- Triangles, flags, pennants, and rectangles are examples of continuation patterns that market traders often work with. Note:- Continuation patterns organize the price action a trader is observing in a way that allows them to execute a plan to take advantage of the movements.
Let’s take a closer look at continuation patterns- what they are, what they mean, and how we might use them to our advantage.
Symmetrical Triangle
A triangle consists of two opposing trend lines. Imagine that a series of lower highs appears on a chart, simultaneously coexisting with a series of higher lows. The result would be two trend lines that move toward each other. This formation is known as a ‘‘symmetrical triangle’’
Bullish Ascending Triangle
In this pattern, the bulls show their power by forming a series of higher lows. Because the bulls are willing to make purchases at consistently higher prices, they are considered the aggressive party. Meanwhile, as the bulls push higher, the bears are unable to create momentum in the opposite direction. Instead, the bears form a horizontal resistance level. This indicates that the bears are simply trying to stand their ground as the bulls thrust toward them from increasingly higher levels. The assumption is that the aggressive party, in this case the bulls, will eventually overcome the passive bears and push through resistance.
Ascending Triangle Chart Pattern
Bearish Descending Triangle Pattern
This is the inverted version of the ascending triangle. In this case, the bears demonstrate their superior firepower by pushing the price to a series of lower highs. Meanwhile, bulls can only form a horizontal support level, indicating a lower level of commitment than the bears. The assumption here is that the passive bulls will eventually be overrun by the aggressive bears. This bearish pattern is considered more effective when it appears within an overall bearish trend, although this is not a requirement.
Flags and Pennants
The price makes a sharp directional move and then consolidates the move by ‘‘resting.’’ The period of rest is frequently expressed in the form of shapes called ‘‘flags’’ and ‘‘pennants.’’ The expectation is that after the flag or pennant is completed, the prior trend will resume.
Bull Flag Pattern
A bull flag pattern begins with a sharp, almost vertical bullish movement. This move indicates that the bulls are the dominant party. This initial bullish move is known as the ‘‘flagpole.’’
This initial thrust is followed by mild reversal, which slopes gently in the opposite direction. This second move indicates that the bears are unable to muster an equivalent response. The bear move forms a shape that is bounded by two parallel lines, resembling a flag.
Consider the implications of those two movements; the first move shows the bulls are firmly in charge, and the mildly bearish reaction to this move merely confirms this fact. What is expected to happen next should come as no surprise.
The dominant party, in this case the bulls, are expected to take control. As a result, the price is expected to continue moving higher. How much higher? A measuring technique is used to determine the bull flag’s price target.
The first step is to measure the height of the flagpole. Then, if and when the price breaks out of the consolidation, traditional technical analysis assumes that a move of equal magnitude will occur.
Bull Pennant Pattern
The bull pennant pattern is similar to the bull flag pattern. Like the bull flag, it begins with a sharp thrust higher, followed by a mildly bearish consolidation. In this case, the consolidation is shaped differently from the flag, instead of two parallel lines, the consolidation resembles a small symmetrical triangle.
While the shape is slightly different, the meaning is unchanged the bulls are firmly in charge here, and when given an opportunity to respond, the bears can do little about it. Once the price breaks out of the pennant, the bulls are expected to reassert their dominance.
Bear Flag Pattern
A bear flag pattern begins with a sharp thrust lower, indicating that the bears are aggressive. This initial thrust is the flagpole.
The bulls can only manage a mild response, in the form of a gently rising consolidation bounded by two parallel lines. If and when the
price breaks downward from the consolidation, a move equivalent to the size of the flagpole is anticipated.
Bear Pennant Pattern
The bear pennant is similar to the bear flag with one major difference-the shape of the consolidation after the initial move resembles a symmetrical triangle rather than a flag. Otherwise, the patterns are similar, as is the method used for determining a target price.
Wedges
Bullish Wedge
A bullish wedge, also referred to as a falling wedge, is a continuation pattern that slopes downward, in the opposite direction of a prior bullish trend.
In this sense, it’s similar to a bull flag pattern, in which the flag itself slopes in the opposite direction of the trend. While the pattern contains a series of lower highs and lower lows, each subsequent low barely exceeds the previous low, causing a line drawn beneath those lows to slope gently lower.
This contrasts with a line drawn above the lower highs, which forms a steeper slope. The two resulting lines converge at an angle. As these lines draw nearer to each other, a move in the direction of the prior trend is anticipated.
A bearish wedge, also known as a rising wedge, is a continuation pattern move that slopes upward, in the opposite direction of a bearish trend. In this sense, it’s similar to a bear flag pattern, in which the flag itself slopes in the opposite direction of the trend.
The pattern contains a series of higher highs and higher lows, the line drawn above the highs slopes gently higher, while the line drawn beneath the higher lows forms a steeper slope. As the two resulting lines converge, the price resumes its downward trend.
Bullish Rectangle
A bullish rectangle occurs when, after moving higher in an uptrend, the price forms a sideways consolidation, which is bounded by clear levels of support and resistance. The area of consolidation resembles a box or a rectangle.
Bearish Rectangle
A bearish rectangle occurs when the price forms a sideways consolidation after trending lower. The consolidation area is bounded by clear levels of support and resistance, and resembles a box or a rectangle. This consolidation merely represents a pause in the action prior to the resumption of the downtrend.
Additional Chart Pattern
Cup with Handle Chart Pattern
What is the ‘‘cup with handle’’ formation? It’s a bullish pattern that was identified by William O’Neal.
As the name implies, the cup with handle pattern consists of two separate parts: the cup and the handle. The cup resembles a single rounded bottom, but with a caveat. Unlike a double bottom or a triple bottom, it is not required that the cup with handle pattern appear in a downtrend.
The cup’s rounded bottom is supposed to indicate a ‘‘shaking out’’ process. It gives bears and uncommitted longs an opportunity to sell the stock.
The handle is simply an ‘‘echo’’ of the cup. It often resembles a smaller version of the cup itself. The handle represents one last chance to shake out the weak hands before the stock begins to move higher.
Here are some general guidelines for the cup with handle pattern:
1. The cup should be at least seven weeks in duration.
2. There is no time limit on how long the cup can be. Ideally, the handle retracement is equal to just 15 to 25 percent of the depth of
the cup.
3. The process of forming the handle should take at least five days.
4. The breakout from the handle should occur on high volume.
Cup with Handle Formation
The Broadening Formation
The broadening formation consists of a series of higher highs and lower lows, and presents a very frustrating scenario for trend traders.
So we can say continuation patterns indicate a high degree of likelihood that the price will continue moving in its current direction. When it comes to price patterns, location is of key importance. It could be said that a chart pattern is defined not only by its shape, but by the price action that precedes it. Triangles, flags, and pennants are common examples of continuation patterns.
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