Spotting continuation patterns (flags, pennants)There are many technical set ups that try to capture the specific market dynamics associated with trend continuation. We call them flags, pennants, buying the dips in an up trend or selling the rallies in a down trend, among other things.
The underlying market activity in these situations helps explain what happens.
In the case of a bullish move:
For some reason, a news event for example, there will be an influx of buyers causing price to move sharply up.
When this has happened price will consolidate as buyers take profits and some sellers enter. This is reflected in the chart by a short, slight, counter trend correction as both sides battle it out. During this time, there is likely to be reduced momentum and volume.
After a little while, buyers will overwhelm sellers and price will break out, above the upper bound of the consolidation.
The trend will resume, and price will move sharply again, typically in a measured move as large as the move preceding the consolidation.
GoNoGo Charts help identify patterns such as these. Above is a chart of $IEA
A Go Trend is in place, and when the consolidation happens we look for these things:
- The “Go” trend bars to weaken to an aqua color (latter part of shaded channel)
- The Oscillator to fall to zero on decreasing volume (paler blue of GoNoGo Oscillator)
- A low risk entry (green circle) to appear as the oscillator bounces off zero (we get two here)
- Volume to pick up as price leaves the pattern (dark blue of the GoNoGo Oscillator)
