Flag, Pennant and Wedge Patterns

Bullish/Bearish Flag

Bull flag for W Resources shares

A bullish flag is one of many possible patterns that can form after a sharp spike (which forms the flag pole) in a company's share price. A bullish flag formed for W Resources in early 2012 following a massive 156% rise. The bull flag formation involves the share trending in a downward channel immediately after the spike upward. Some way down the line, the shares then proceed to break out of the top of the channel and a rise follows that is often at least as large as the rise that constituted the flag pole.

A bullish flag can therefore be noted as a consolidation pattern with the shallower the flag gradient, the greater the reliability of a steep second breakout.
A bearish flag involves a share found in a downtrend that has spiked to the downside. Having spiked downwards, the shares often recoup a small portion of the gains over the coming weeks which leads to the formation looking like a reflected tick. It is bearish because the shares can proceed to break out of the bottom of the flag and generate a second large fall taking the share price below the initial rebound point. Investors would not want to purchase shares should a bearish flag form unless there are strong short-term corporate reasons to do so.

Bullish/Bearish Pennant

Bullish pennant for Sareum shares

The pennant formation is similar to the flag formations in three main ways. Firstly it also involves a spike up and the formation of the pole, and secondly it is a pattern that immediately starts to form following the spike up. In addition, the end result of both is a break out. The difference is what happens in between these points.

Whilst in a flag formation the shares trend higher/lower, in a pennant they trend horizontally (overall) forming a shape similar to that of a symmetrical triangle. When the triangle pinches out, the shares tend to break higher. A bearish pennant is found in the same way as a bearish flag is, as a brief respite within an overall downward trend with a downward breakout as it is a continuation pattern.

Rising/Falling Wedge

Rising wedge for Rexam shares
Wedge chart patterns are common, and tend to represent trend channels with a slight upward/downward bias. Wedges are the same as trend channels except the lines are not parallel - they are slightly slanted which means that pinch-outs also occur. Rising wedges give rise to upward breakouts more often than not with falling wedges giving rise to both upward breakouts (if the share price is depressed enough/company releases fundamentally positive news) and downward breakouts.

The fact that the wedges can be both bullish and bearish once again means that confirmation is required and investors tend not to preempt breakouts as many are false dawns. A rising wedge is shown for Rexam in 2012. The shares broke strongly upwards in early 2013 past the rising resistance giving a clear buy signal especially since the psychologically 500p barrier was broken through and left behind as support.