🚩 Continuation patterns: flags, pennants, triangles, wedges, rectangles, cup with handle

🎯 In 30 seconds: A continuation pattern is a rest inside a trend. Flags and pennants are short pauses after a sharp move. Triangles, wedges and rectangles are longer contests between two boundary lines. The cup with handle is a rounded base that ends near the old high. Each has a boundary that price must close through, a measured target from its size, and a stop on the other side. Each can also break the wrong way.

Why trends pause

After a strong push, early buyers take profits and new buyers wait for a better price. The result is a stretch of sideways or slightly countertrend trading while positions change hands.

If that pause is orderly and quiet, the trend before it is more likely to resume than to reverse. More likely is not certain, so each pattern below comes with the point where you give up on it. Breakout mechanics are covered in Gaps and breakouts.

Flags and pennants

A bull flag has two parts:

1. The pole. A steep, fast rise over a handful of sessions, often on heavy volume. No pole, no flag.
2. The flag. A small channel with parallel lines that drifts sideways or slightly down on lighter volume. It lasts a fraction of the pole’s time and gives back well under half its gain.

The trigger is a close above the upper flag line. The target adds the pole length to the breakout price. The stop sits below the flag’s low.

A pennant swaps the channel for a small converging triangle. A bear flag is the mirror inside a decline. A pause that retraces most of the pole, or drags on far longer than the pole took, is no longer a flag.

Triangles

• Ascending. A flat ceiling and rising lows. Sellers supply stock at one price while buyers step in higher each time. Usually expected to break up.
• Descending. A flat floor and falling highs. Usually expected to break down.
• Symmetrical. Falling highs and rising lows. The direction is open; many traders lean toward the prior trend and let the break decide.

Draw the lines through swing points, not stray wicks, with at least two touches each. Classic texts observe that the more useful breakouts tend to come between about halfway and three quarters of the way to the apex, where the lines meet. Price that drifts right into the apex often just fizzles.

Target. Take the height at the widest point, near the start, and project it from the breakout price.

Wedges

• Rising wedge. Both lines rise, the lower one faster. Each new high gains less ground. It usually breaks down: a continuation inside a downtrend, a reversal at the end of an uptrend.
• Falling wedge. Both lines fall, the upper one faster. Each new low loses less ground. It usually breaks up.

A common target is the price where the wedge began. Since wedges can continue or reverse a trend, read them alongside the next larger time frame.

Rectangles

A rectangle is a range with a flat top and flat bottom, each touched at least twice. The trigger is a close outside either line, and the target is the range height projected from the break. Many traders only take breaks in the direction of the prior trend.

Cup with handle

1. Prior rise. A meaningful uptrend leads into the cup.
2. The cup. A rounded decline and recovery, U-shaped rather than V-shaped, back near the old high.
3. The handle. A short, shallow drift lower near the right rim on quiet volume, staying in the upper half of the cup.
4. The trigger. A close above the rim and the handle high.

The target is commonly the cup depth added to the rim, with the stop below the handle low. A deep handle or a V-shaped cup makes the base weaker by the usual reading.

Worked example (hypothetical stock MNO)

MNO rises from $40 to $50 in seven sessions on strong volume. It drifts between $48.00 and $49.50 for four quiet sessions, then closes at $50.20, above the channel.

That ratio shows why flags are popular. Full pole-length moves are far from guaranteed, though, so a sensible plan takes some profit at the next resistance and trails a stop on the rest.

How continuation patterns fail

• Wrong-way break. A bull flag that closes below its lower line has failed, and the stop handles it.
• False break. A close outside the line, then back inside within a day or two. Common near triangle apexes.
• Market tide. A flag inside a market-wide sell-off often breaks down with everything else.
• Forgiving drawing. Lines bent to fit every wick turn any chop into a triangle.

What to check before trusting one

1. Is there a strong trend into the pattern, and is the pause shorter and shallower than that move?
2. Did volume shrink during the pause and rise on the break?
3. Were the lines drawn through real swing points?
4. Did the breakout close outside the line, or only poke through intraday?
5. Is the target beyond the next major resistance? If not, plan for the nearer level.

Sources

• Robert D. Edwards and John Magee, Technical Analysis of Stock Trends (first published 1948).
• John J. Murphy, Technical Analysis of the Financial Markets (1999).
• Thomas N. Bulkowski, Encyclopedia of Chart Patterns, 2nd edition (2005). Further reading.
• Moneydesks Technical Analysis tool: trend line and measure tools, volume, Chart events.