Chapter 6 Continuation patterns

Introduction * Reversal patterns usually take much longer to build and represent major trend changes. Continuation patterns, on the other hand, are usually shorter term in duration and are more accurately classified as near term (~3 weeks) or intermediate (3 weeks~3 months) patterns. Usually (but, there are exceptions): Triangles are usually (intermediate) continuation patterns, but sometimes act as (major) trend reversal patterns. Broadening formation (a variation of the triangle -the inverted variety) usually signals a major market top. Even the head and shoulders pattern, the best known reversal pattern, will on occasion be a consolidation pattern.

Triangles Three types of triangles: (Figures 6.1a-c) The symmetrical triangle (coil) shows two converging trendlines, the upper line descending and the lower line ascending. The ascending triangle has rising lower line with a horizontal upper line. (bullish pattern) The descending triangle has the upper line declining with a flat bottom line. (bearish pattern) Base: the vertical line at the left, measuring the height of the pattern Apex: the point of intersection at the right, where the two lines meet.

Triangles

The symmetrical triangle The symmetrical triangle is usually a continuation pattern. It represents a pause in the existing trend after which the original trend resumed. The minimum requirement for a triangle is four reversal points. In order to draw two converging trendlines, each line must be touched at least twice. [actual trend signal, a minimum criterion for breakout] The actual trend signal is given by a closing penetration of one of the trendlines. (指closing price outside the trendline)

Triangles

The symmetrical triangle: Price and Time The triangle provides an interesting combination of price and time. (Time target) As a general rule, prices should break out in the direction of the prior trend somewhere between 2/3 to 3/4 of the horizontal width of the triangles. If prices remain within the triangle beyond the 3/4 point, the triangle begins to lose its potency, and usually means that prices will continue to drift out to the apex and beyond. (Price support/resistance) Sometimes a return move will occur back to the penetrated trendline after the breakout. In an uptrend (downtrend), that line becomes a support (resistance) line. The apex also acts as an support or resistance level after the breakout occurs.

The symmetrical triangle: Measuring techniques for prices (Price target) Figure 6.2 One is to measure the height of the base (AB); project that vertical distance from the breakout. (project up in an uptrend) Another method is to draw a parallel line upward from the top of the baseline (A) parallel to the lower line in the triangle. Prices will sometimes hit the channel line at the same time the two converging lines meet at the apex.

Symmetric triangle: Measuring technique

The symmetrical triangle: Volume *The tendency for volume to contract is true of all consolidation patterns. Volume should diminish as the price swings narrow within the triangle. *An increase in volume is essential to the resumption of an uptrend in all consolidation patterns. As in the case with reversal patterns (at bottom), volume is more important on the upside than on the downside. [*Point] Even though trading activity diminishes during formation of the pattern, a close inspection of the volume usually gives a clue to whether the heavier volume is occurring during the up-moves or down-moves. (See the below) In an uptrend, for example, there should be a slight tendency for volume to be heavier during the bounces and lighter on the dips.

The ascending and descending triangles Q: The ascending and descending triangles have different forecasting implications from symmetrical triangles.

The ascending triangle (bullish) The ascending triangle has a flat upper trendline and a rising lower trendline. (Figure 6.3a) It is a bullish pattern and most often occurs in an uptrend. (continuation). It is usually resolved with a breakout to the upside. It indicates that buyers are aggressive than sellers. It is also usual toward the end of a downtrend to see an ascending triangle (major reversal). As in the case of all valid upside breakouts, volume should see a noticeable increase on the breakout. A return move back to the support line (the flat upper line) with light volume is usually seen. Measure the height of the pattern at its widest point and project that vertical distance up from the breakout point.

The ascending triangle

The ascending triangle

The descending triangle (bearish) The descending triangle has a descending upper trendline and a flat lower trendline. (Figure 6.4a) It is a bearish pattern and is usually found within downtrends. (continuation) *It is also usual toward the top (end) of an uptrend to see a descending triangle. A close below the flat line lower line would signal a major trend reversal to the downside. [*ask: what time horizon used to observe a major or intermediate trend?] A return move back to the resistance line (the flat lower line) is usually seen. Measure the height of the pattern at the base to the left and project that vertical distance down from the breakout point.

The descending triangle

The descending triangle

Summary: The triangles (right angle triangles) The volume of both ascending and descending triangles diminishes as the pattern works itself out and then increase on the breakout. The volume pattern coinciding with the swings in the price action.量價一致 In the ascending pattern, the volume tends to be slighter heavier on bounces (upside) and lighter on the dip. In the descending formation, the volume should be heavier on the downside and lighter during the bounces. ** The triangle is considered as an intermediate pattern, meaning that it last 1 to 3 months. *A triangle that lasts less than 1 month is a different pattern, such as a pennant. Triangles sometimes appear on long term price charts.

The broadening formation It is also called a megaphone top. *The volume tends to expand along with the wider price swings. This situation represents a market that is out of control and emotional. ** It most often occurs at major market tops. The expanding pattern is usually a bearish formation.泡沫越吹越大

The broadening formation

Flags四方旗 and pennants小三角旗 *The flag and pennant formations are quite common, are among the most reliable of continuation patterns, and are rarely produce a trend reversal. They represent brief pauses in a dynamic market move. Flags are formed by two parallel trendlines that tend to slope against騙線the prevailing trend. (Figure 6.6a) The pennant is identified by two converging trendlines, and is more horizontal. (Figure 6.6b) [Point, Requirement] They preceded by a sharp and almost straight (vertical) line move .旗桿 They represent situations where a steep advance or decline has gotten ahead of itself, and where the market pause briefly to “catch its breath” before running off again in the same direction. [Requirement] Volume should dry out noticeably while flags and pennants are forming.

Flags四角旗 and Pennants三角旗

Flags and pennants * The flag and pennant formations last 1-3 weeks. In downtrend, they takes less time to develop. (less than 1 to 2 weeks) The breaking of the trendlines should take place on heavier volume. [Time target] Flags and pennants are called “fly at half-mast” from flagpole. Flagpole is the prior sharp advance or decline. The term “half-mast” suggests that these minor continuation patterns tend to appear at about the halfway point of the move. [Price target] In general, the move after the trend has resumed will duplicate the flagpole or the move just prior to the formation of the pattern. To be more precisely, the vertical distance of the preceding move is then measured from the breakout of the flag or pennant.

Bullish Flag

Pennants

Flags and pennants: * summary They are both preceded by an almost straight line move (flagpole) on heavy volume. Prices then pause for about 1-3 weeks on very light volume. The trend resumes on a burst of trading activity. Both patterns occur at about the midpoint of the market move. The pennant resembles a small horizontal symmetrical triangle. The flag resembles a small parallelogram that slopes against the prevailing trend. Both patterns take less time to develop in downtrend. Both patterns are very common in the financial markets.

Wedge小旗 (like a horizontal V shape, not a triangle) Wedges most often constitute continuation patterns. The wedge formation. (Figures 6.8a-b) Special issue of wedges as tops and bottom reversal

A bullish falling wedge(騙線) and a bearish rising wedge (騙線)

Wedge The wedge formation The wedge formation is similar to a symmetrical triangle both in terms of its shape and the amount of time it takes to form. * The noticeable slant of the wedge distinguishes it from the symmetrical triangle. * It takes about 1-3 months to form, putting it into the intermediate category. Like the flag pattern, the wedge slants against the prevailing trend.(騙線) [Maxim] A rising wedge is bearish and a falling wedge is bullish.

Wedge Wedges as tops and bottom reversal patterns Wedges most often constitute continuation patterns. (less common) It is much less common that the wedge can appear at tops or bottoms and signal a trend reversal. *If it is an reversal, then (at Top) near the end of an uptrend, we can see a clear-cut rising wedge. (Because a continuation wedge in an uptrend should slope downward. (at Bottom) a falling wedge near the end of a downtrend would signify a end of bear trend.

A bearish rising wedge

Rectangle A rectangle is formed when prices move sideways between two parallel horizontal lines. It represents a pause, a consolidation. A rectangle is also called a trading range, a congestion area, or a line. A rectangles is similar to a symmetrical triangle, with flat instead of converging trendlines. **A rectangle consolidation does not turn into a reversal. A decisive close outside either the upper or lower boundary signals completion of the rectangle and points the direction of the trend. In Figure 6.9a, three peaks might initially viewed as a triple top reversal, but is a rectangle.**(Watch volume) If the rallies are on heavier and the setbacks on lighter volume, then it is a continuation in the uptrend. But, if the heavier volume is on the downside, it can be a reversal (triple tops, not rectangles).

Bullish and bearish rectangles

Bullish rectangle

Rectangle: Tactics * Oscillators are especially useful in sideways trading markets, but are less useful once the breakout has occurred (in trend now). * Most trend-following systems (MA) perform poorly during these sideways. When a breakout does occur, the trader not only exits the last losing trade immediately, but can reverse the previous position by initiating a new trade in the direction of the new trend. [Tactic] Some traders take long position near the lower end of the price band in an uptrend, or initiate short positions near the top of the range in downtrends. Others would avoid such trendless markets and await a clear-cut breakout.

Rectangle Similarities and differences * Similar to triangles and wedges, rectangles last 1-3 months. ? The volume pattern differs from other continuation patterns in the sense that the broad price swings prevent the usual drop-off 下降in activity seen in other such patterns. (Measuring technique) Measure the height of the rectangle and project that vertical distance from the breakout point. Support, resistance (similar as before)

The measured move The measured move, or the swing measurement describes the phenomenon where a major market advance or decline is divided into two equal and parallel moves. (Figure 6.10a) For this approach to work, the market moves should be fairly orderly and well defined. ? When the chartists see a well-defined situation, then it retraces the all height from the correction point. A variation of what ??? (Review) Flags and pennants occur at about the halfway point of a market move. (Review) The tendency of markets to retrace about a third to a half of a prior trend.

Measured move in a uptrend

P&G measured move

The continuation head and shoulder “NOT a head and shoulder” Looks like a sideways rectangular pattern, except that the middle trough in an uptrend tends to lower than either of the two shoulders. (Figure 6.11a) the middle peak in a downtrend tends to higher than either of the two shoulders. (Figure 6.11b) It is a head and shoulder pattern turned upside down at top. Confirmation vs. divergence

Bullish and bearish “continuation head and shoulders”

GM “continuation head and shoulders”