Flag and pennant patterns are technically two different chart patterns investors can use to make informed decisions on how a stock may unfold.
However, they tend to be lumped into the same category because they have a similar looking shape. And while they have different properties, there are a few other similarities that make it possible for investors to use them interchangeably.
What are Flag and Pennant Patterns?
As is the case with pretty much every chart pattern, the name of the flag and pennant patterns yield clues as to what type of shape investors may be looking for as they scour a chart. A flag pattern carries a rectangular shape that looks like a flag. A pennant pattern, on the other hand, has a triangular shape that looks like a triangle, although it may be misconstrued by some to be a symmetrical triangle.
Both flags and pennants are considered to be two continuation patterns. In the world of technical analysis, this means it’s a pattern that potentially signals a trend may be showing a temporary diversion in behavior, only to eventually move forward on its existing trend. They are formed in a similar fashion; namely, they’re created when there’s a sharp movement in stock price that’s followed up by a sideways price movement. They also complete in a similar fashion, as they both wrap up with a price breakout in the same direction of the original sharp price maneuver. This is followed by a move that sees a similar sharp move in the same direction as the previous sharp move. The overall move of the chart pattern is known as the flag pole, regardless of what pattern name is used.
What’s more, there are overall pattern shapes that dictate whether or not a flag or pennant needs to be flying at “half-mast.” This occurs when the distance of the original price movement is thought to be approximately equivalent to the prior price move. The reason these patterns are created is due to action caused in the wake of a large price movement. In this situation, the market consolidates or pauses before resuming the initial trend.
The Look and “Movement” of a Flag
The flag pattern appears to have the appearance of a rectangle. It’s formed by twin parallel trendlines which act as support and resistance for the price until a price breakout occurs. Investors should not expect the flag to “fly” perfectly flat. Instead, they will have its trendlines drawn at a sloping angle.
Typically, the flag’s slope should move in the opposite direction of the original sharp price movement. For instance, if the initial movement were going upward, the investor should expect to see the flag sloping downward.
The flag will produce its buy or sell signal once the stock price breaks through the pattern’s line of support or resistance, as long as the trend continues in its previous direction. As is the case with other pattern-driven breakthroughs, investors would be wise to check the volume surrounding the breakthroughs to determine the signal strength.
The Look and “Movement” of the Pennant
As mentioned earlier, the pennant pattern can look similar to that of a symmetrical triangle, which is another pattern that investors can use to track stock price movement. The pennant is “drawn” by the trendlines of support and resistance, as they eventually converge toward each other. The difference between the pennant and the triangle is that in the case of the pennant, the stock does not have to test each support or resistance level several times before the breakthrough. A symmetrical triangle, on the other hand, will have a tendency to test either trendline before breaking through and completing the pattern.
There is also one fundamental difference between the pennant and the flag. In the case of a pennant, the direction that it “flies” is not as important as the direction of a flag. With that being said, the pennant is typically flat.
Things to Consider when Using a Flag or Pennant
Even though flags and pennants have slightly different constructs, their attributes of the chart patterns are similar enough to where investors can use them interchangeably. As such, savvy investors will keep their eye out for specific manifestations on either pattern.
For one thing, it’s important that the price movement before the flag or pennant’s formation be a strong, sharp move. Without this in place, the rest of the pattern really can’t “fly,” if you will. Also when a strong pattern does develop, the patterns take less time to form during downtrends than in uptrends. Generally speaking, investors can expect the pattern to just last one to three weeks, although it is possible for the patterns to form over longer periods of time.
Also, volume plays a huge role in determining whether or not the breakout of a price point is worth following. If the volume surrounding a price breakthrough is strong, investors may find the stock worthy of action. If it’s weak, they may want to look elsewhere.
A Good Reputation
Flags and pennants both have a sterling reputation for being one of the most reliable continuation patterns available to investors. This pattern rarely produce trend reversals, and this lessening of “guesswork” that can sometimes be part of other patterns further enhances their dependability.
Of course, it should be emphasized that this reliability does not equate to the presence of a sure thing. Stocks may exhibit predictable behavior, which could be detected by the use of various chart patterns, but various variables that are constantly present in the stock market could lead a solid looking prediction going unfulfilled. As such, savvy investors will know to proceed with cautious optimism.
With that being said, the flag and pennant chart patterns follow through with the dual objectives that are found with any chart pattern. That is, to help investors find ways to maximize profits while minimizing risk. This is the case no matter which pattern investors use. And because they look and act so similarly, there’s an excellent chance that they’re using both.