These continuation pattern formations are quite common and usually show up at approximately the same place in an existing trend. They are very similar in appearance and have the same volume and measuring criteria.

Both flags and pennants represent a brief pause during a dynamic market move. In both cases, there will be a steep, almost straight line move called a flagpole before and after the formation. In the two graphs below, you see bullish examples of each formation.

Being one of the most reliable continuation patterns, only rarely will the flag or pennant result in a trend reversal. You can see from the example graphs below that in both patterns there is a steep price advance on heavy volume at the beginning. Notice the drop in activity during the formation, and the sudden increase on the upside breakout.

There is only a little difference in the makeup of these two patterns. The flag is a rectangle made of two parallel trendlines. The slope of the flag tends to be against the flow of the trend, upward in a downtrend and downward in an uptrend.

The pennant, which is more horizontal, has two converging trendlines and resembles a symmetrical triangle. It is a must, in both patterns, that volume dry up noticeably while they are forming.

Flags and pennants are usually completed within one to three weeks in uptrends and within one to two weeks in downtrends. Completion is signaled by the penetration of the upper trendline in uptrends and the lower line in downtrends, and always occurs on heavier volume.

Andy Swan is co-founder and head trader for DaytradeTeam.com.  To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.