A continuation pattern suggests that a trend in a security price series chart is expected to continue. There are several continuation patterns that technical analysts will identify as an indicator of an extended price trend.
Continuation patterns tend to be the most accurate when the trend has existed for around one to three months. These patterns show some stalling in the trend but are not expected to indicate a reversal. (See also: Continuation Patterns: An Introduction)
Some common continuation patterns include: triangles, pennants, flags and rectangles. Below are descriptions of these continuation patterns.
Triangles: Triangles can be easily mistaken for wedges and also form the basis for pennants. In a triangle pattern the resistant and support lines have opposite slopes with one reporting a negative slope and the other a positive slope. In a triangle continuation pattern the sloping lines will distinctly join at the convergence point. Triangles can be symmetric, ascending or descending. The bars of the sloping lines typically represent a slightly longer timeframe than a pennant. (For more on triangle patterns, see also: Analyzing Chart Patterns: Triangles)
Pennants: Pennants are a form of a triangle, also reporting opposite sloping lines. However, pennants will have shorter trendlines. Typically, pennants will have connecting bars that span over approximately 20 days. This compares to triangles which have longer sloping lines. (For more on pennants, see also Analyzing Chart Patterns: Flags and Pennants)
Flags: Flags are represented by two short-term parallel lines. Flags can be either ascending or descending. Flags show the volatility that can occur within a price trend.
Rectangles: Rectangles are a common continuation pattern that show a pause in the price series trend with price action moving sideways. A rectangle pattern is drawn from two zero sloping parallel trendlines. These trendlines drawn at the resistance and support levels identify sideways movement which infers that the series trend is only paused and likely to continue.
Continuation patterns can be important to spot for both long-term and short-term traders. They provide a trader with insight that a previous trend shown from a broader and longer-term ascending, descending or sideways channel is expected to continue. If a continuation pattern occurs within an ascending channel, then the trader can expect that the price will continue to remain bullish over the long-term. The same is true for descending and sideways channels. Both can be expected to continue their long-term trend when continuation patterns are identified.
Continuation patterns generally should be considered in conjunction with trend cycles. A typical trend cycle will include a breakaway gap, followed by several runaway gaps and an exhaustion gap.