Continuation patterns

In the last lesson we discussed reversal patterns, i.e. formations of the price action that tend to signal that the trend is about to change, in the current lesson we are to discuss continuation patterns.

Continuation patterns usually indicate that the sideways price action on the chart is nothing more than a pause in the prevailing trend, and that the next move will be in the same direction as the trend that preceded the formation.

We make a start with triangles

The ascending triangle is formed when the price action is condensed between an upward  trendline and a resistance line. In such a case the price action seems to be pushed upwards by the upward trendline and yet the price action at the same time is being capped by a specific resistance level forming a triangle. In such a case the trendline is considered to be stronger that the resistance lien and thus the formation is considered to be bullish. I.e. it implies that ultimately the price action is to be able to break above the resistance line and continue higher despite the temporary capping.

The Descending triangle implies the opposite. It is being formed by a downward trendline and a specific support level squeezing the price action. In this case he downward trendline is expected to be stronger than the support level, holding the price action afloat and ultimately is expected to drive the price action lower.

The last triangle to be discussed is to be the symmetrical triangle. The symmetrical triangle is being formed by two converging trendlines, an upward trendline and a downward trendline. In such a case the price action could go either way following one of the prementioned trendlines.

The next formation to be considered is Flags. A bullish flag consists of a strong upward movement followed by a condensing of the price action in a downward channel that is usually brief if duration and is broken to the upside by the price action. In such a case the price action is expected to continue its ascent higher. A bearish flag consists of a strong downward movement followed by an ascending channel which in turn is broken to the downwards by the price action and is thus signaling the continuation of the downward movement.

Similarly to flags are also pennants. A bullish pennant consists of a strong upward movement followed by a condensing of the price action in a symmetrical triangle that is usually brief if duration and is broken to the upside by the price action. In such a case the price action is expected to continue its ascent higher. A bearish pennant consists of a strong downward movement followed by a symmetrical triangle which in turn is broken to the downwards by the price action and is thus signaling the continuation of the downward movement.

In the next lesson we are to enter mechanical technical analysis and discuss moving averages