One of the most basic tools used in technical analysis are chart patterns used to forecast stock price movements. There are two types of chart patterns: reversal and continuation patterns. A reversal pattern suggests that the trend is going to reverse, whereas a continuation pattern implies that the trend will continue in the same direction after a small consolidation.
This blog will discuss common continuation patterns, what they mean, and how to interpret them.
What are Continuation Patterns?
Continuation patterns are chart patterns that indicate a short-term interruption of the trend, which then resumes. These give a trader an entry point in the direction of the trend before it moves again in the existing direction. Both in uptrends and in downtrends, these patterns indicate the trend is likely to continue following a pause.
Types of Continuation Chart Patterns
Some of the common continuation patterns are:
Triangles
Triangles are one of the most frequently occurring continuation patterns that emerge when price is trading inside a constricting range forming a triangular shape. There are three types of triangles:
- Symmetrical Triangle: Lower highs and higher lows go to a converge point that shows indecision in the market. Once the price breaks out of the triangle, it usually resumes the prior trend.
- Ascending Triangle: Characterized by a horizontal upper boundary and rising lower line, meaning the stock is making higher lows. Generally, it is a bullish continuation pattern.
- Descending Triangle: The descending triangle contains a flat lower boundary and declining upper bounds. In contrast to the ascending triangle, this pattern will be viewed as a bearish continuation. When the price breaks below the support, it is likely to continue downwards.
Flags
Flag patterns resemble a small sloping rectangle against the trend. The pattern is created after the price consolidates in a narrow range following a sharp move upwards or downwards.
- Bullish Flag: When an uptrend consolidates after a sharp rally, this is called a bullish flag. A breakout above its resistance confirms that the uptrend will continue.
- Bearish Flag: Following a clear price decline, consolidation is observed in the form of a bearish flag. A break below the support line of the flag will affirm continuation in the downtrend.
Pennants
Pennants are like flags, except that they are triangular, indicating a small consolidation move before the price breaks the trend.
- Bullish Pennant: After a bullish upmove, the chart forms a pennant, making lower highs and higher lows. A breakout outside the pennant means the uptrend is likely to continue.
- Bearish Pennant: After a downmove, the price consolidates in a pennant pattern forming higher lows and lower highs. Then the breakout is on the downside, signalling the fall will continue.
Rectangles
A rectangle is the most basic continuation pattern, in which price is bounded within a range of price oscillating between a level of support and resistance. This shows consolidation.
- Bullish Rectangle: Sideways movement of price following an uptrend creates the rectangle formation. The breakout above the resistance will resume the uptrend.
- Bearish Rectangle: After a downtrend, the stock starts to make sideways movements, forming a rectangle between two support and resistance levels. A breakout below the support means that the downtrend is likely to continue.
Wedges
Wedges are continuation patterns in which the price moves between converging trend lines like triangles, but in this case, they do not meet.
- Rising Wedge: The pattern follows an upward trend, after which the price starts moving sideways with higher highs and lows but with a narrowing movement. A breakout from the lower trend line indicates the continuation of the downtrend.
- Falling Wedge: After a downtrend, prices form lower highs and lower lows amid converging support and resistance lines. A breakout on the higher trend line sets up the continuation of an uptrend.
Interpretation of Continuation Patterns
While interpreting continuation patterns can be simple, there are further considerations you should keep in mind before acting on them.
- Trend Context: Confirmation patterns are more reliable in strong trending markets. Look for the trend before acting on these patterns.
- Volume Confirmation: When a continuation pattern appears, look for an accompanying increase in volumes as this would make the pattern more reliable.
- Timeframes: The longer the timeframes, the more reliable any continuation patterns will be.