Major Continuation Patterns

Continuation patterns indicate a temporary pause in a prevailing trend where prices consolidate before resuming movement in the original direction. A prerequisite for any continuation pattern is the existence of a prior trend.

Key Concepts and Confirmation

• Prerequisite: The existence of a prior trend.
• Indication: A temporary price consolidation before the trend resumes.
• Direction: The subsequent move will be in the same direction as the trend that preceded the pattern formation.
• Confirmation: Trading volume plays a crucial role in confirming these price patterns.

Types of Continuation Patterns

The most common trend continuation patterns include:

• Triangles (Ascending, Descending, Symmetrical)
• Wedges (Falling/Bullish, Rising/Bearish)
• Flags and Pennants
• Rectangles

Detailed Analysis of Patterns

1. Triangles

There are three main types: Ascending, Descending, and Symmetrical (which can be both bearish and bullish).

Bullish Triangles (Uptrend Continuation)

• Formation: Contains at least 2 lower highs and 2 higher lows. Connecting these points forms the triangle structure converging to an apex.
• Volume during Formation: Volume should decrease as the price moves within the triangle.
• Breakout Timing: The breakout is expected to happen between 2/3 to 3/4 of the width of the triangle.
• Volume during Breakout: Volume should increase as the market breaks out of the pattern.

Measuring Technique for Triangles

Two primary techniques are used to set targets:

1. Base Height Method: Measure the height of the base of the triangle and extend that distance from the breakout point.
2. Parallel Line Method: Draw a parallel line to the lower triangle line (in a bullish case). The target price is estimated where the parallel line meets the projected date of the apex.

The opposite formation, found in a downtrend, is the bearish triangle, and the same rules for breakout and measurement apply.

2. Wedges

Wedges are identified by two converging trend lines that are wide at the base and contract toward an apex.

• Duration: They are intermediate patterns, typically taking more than 25 candles but fewer than 75 candles to form.
• Breakout/Measurement: Like triangles, the same breakout periods and measuring techniques apply.

Bullish Wedge (Falling Wedge)

• Trend: Continuation of an uptrend.
• Slant: Has a noticeable slant to the downside, counter to the prevailing uptrend.
• Identification: A falling wedge is considered bullish.

Bearish Wedge (Rising Wedge)

• Trend: Continuation of a downtrend.
• Slant: Has a noticeable slant to the upside, counter to the prevailing downtrend.
• Identification: A rising wedge is considered bearish.

3. Flags and Pennants

These represent brief pauses in a dynamic move. They typically occur at the midpoint of the overall market move.

• Preceding Move: Both are preceded by an almost straight line move called a flagpole, which occurs on heavy volume.
• Consolidation Period: Prices pause for a few candles on very light volume.
• Resumption: The move continues on a burst of volume.

Target Calculation

Since they often occur at the midpoint of the market move, the market is expected to move the distance of the initial flagpole after the breakout.

The opposite is the bearish flag or pennant, which forms after a decline before resuming the downward move, with the target based on the initial flagpole distance.

4. Rectangles

The rectangle pattern is easily identified by at least two similar highs and lows, forming horizontal boundaries.

Bullish Rectangle (Uptrend Continuation)

• Confirmation for Continuation: Rallies (upside movements) should occur on heavy volume, and setbacks (downside movements) should occur on lighter volume.
• Warning Sign (Reversal): If the heavier volume is consistently on the downside, it may indicate a possible trend reversal.

Bearish Rectangle (Downtrend Continuation)

• Confirmation for Continuation: Setbacks (downside movements) should occur on heavy volume, and rallies (upside movements) should occur on lighter volume.
• Warning Sign (Reversal): If the heavier volume is consistently on the upside, it may indicate a possible trend reversal.