This is part 14 of a series on technical analysis, specifically about continuation patterns. Click here for the series overview in part one. Click here for part two on the history of technical analysis. Click here for part three on an overview of candlestick charts. Click here for part four on basic candlestick patterns. Click here for part five on advanced candlestick patterns. Click here for part six on Bollinger Bands. Click here for part seven on trend lines. Click here for part eight on Fibonacci retracements. Click here for part nine on moving averages. Click here for part 10 on support levels. Click here for part 11 on resistance levels.Click here for part 12 on momentum and relative strength. Click here for part 13 on reversal chart patterns.
There are many different chart patterns employed by technical traders. We already discussed some patterns which signal a possible reversal is just around the corner, so now we will describe some continuation patterns. Continuation patterns are just as important as reversal patterns because they not only provide buy or sell signals within them but also a sign that the current trend is not about to change. In the case of a bullish trend, this is important because it provides confirmation that it’s not a bad time to buy the security you’re studying. Here are some of the most common continuation patterns you will see on price charts.
Cup with and without handle
One of the most interesting patterns is the cup, which can appear both with and without a handle. Both are continuation patterns. However, they are also considered a bullish indicator meaning that the price could rise significantly after the pattern is complete. For this reason, the cup may also be the most important continuation pattern for you to learn. It’s a great way to identify a stock or other asset that could be about to enter a major uptrend to extend the run it was already on.
The cup pattern looks like a teacup from the side. It starts with an uptrend, usually of at least 30%. This is followed by a smaller pullback that looks somewhat like a U, meaning it’s not just one down followed by an up. The U may not be perfect as the price could bounce around a bit in the formation of the U. After the price rises at the end of the U, the cup without handle is complete. The cup with handle is the same, except after the end of the U, there is a very small and slight pullback before the major uptrend continues.
The U part of the cup should take at least seven weeks to complete, although it can take as long as six months, so this pattern takes quite a while to play out. Cups with shallower bases are forming a stronger base, although occasionally some weaker bases can be as deep as a 40% or even 50% decline during a bear market or correction. The two tops of the U part of the cup should be at about the same price. The handle should be just a very slight drop of about 10% in very light volumes. If volumes are high during the handle part of the cup, it could be a bearish signal rather than a bullish one.
The cup is especially significant if it follows a long uptrend that’s no more than a few months old. The older the pattern is, the less likely that it will signal a major bullish move.
A flat base often appears after a cup with handle or double bottom. It represents a period of consolidation ahead of a continuing uptrend. Securities which enter a flat base are essentially taking time to digest the gains they have already captured. The price swerves up and down several times in a very tight range, usually retracing no more than 15% down after the previous uptrend. The price then remains range-bound until the breakout. When the price breaches the resistance line, the strong uptrend continues.
The consolidation of the flat base lasts at least five weeks. Buying close to the bottom of the range inside the flat base could be a wise move because an uptrend is suggested at the end of the base when the breakout occurs.
Pennant and flag
The pennant consists of a significant price move, followed by a consolidation period and then a breakout in the same direction as the initial move, either up or down. The large move forms the flagpole, and the consolidation is formed by a series of smaller up and down moves which remain within a longer triangle in the shape of a pennant. The first price movement occurs in high volumes, and then the smaller movements inside the pennant itself occur on weaker volumes.
The implications of the pennant are somewhat similar to those of the flat base, except the pattern looks different on the price chart because the range tapers down gradually instead of holding somewhat steady. The breakout that occurs at the end of the pennant should take off in the same direction the price was heading in when the flagpole was formed. Most pennants last about one to three weeks.
This pattern is similar to the flag, which we discussed in the article about candlestick charts. Flags differ because the trend lines which form the pennant converge at the end, while the trend lines which form a flag are parallel to each other. In both cases, the breakout at the end of the pattern occurs in the same direction as the initial big move.
There are a few different kinds of triangles which may appear on price charts. They are ascending triangles, descending triangles and symmetrical triangles. Triangles can sometimes be reversal patterns, but they are usually continuation patterns, which makes them a bit trickier to interpret than the others. Triangles typically take anywhere between a few weeks and several months to complete.
The ascending triangle is a bullish pattern which shares some similarities with the pennant. It marks a period of consolidation before a continuation of the uptrend. Like the pennant, the two trend lines which form the ascending triangle converge. However, the top trend line is usually horizontal with a triangle. The price bounces up and down within the two converging trend lines but remains range-bound and tapering down until the breakout after the end of the triangle.
The descending triangle is a bearish pattern and the reverse of the ascending triangle. The trend line which forms the bottom of the triangle is horizontal, while the top trend line slants downward to converge with the bottom trend line. Descending triangles indicate a pause or period of consolidation after a significant drop. They suggest a further drop is coming, although they can also serve as a reversal pattern. Like in the ascending triangle, the price in a descending triangle also bounds up and down within the range formed by the two converging trend lines.
Symmetrical triangles are also formed by two converging trend lines, and the price remains range-bound between those two lines. A key difference is that the breakout in a symmetrical triangle can occur in either direction. This continuation chart pattern is a sign that a sharp move is about to come, but it is a bit more unpredictable than the ascending and descending triangles.