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How to Recognize Pennants and Flags when Day Trading

Because stock markets tend to move in cycles, technical analysts and day traders look for patterns in the price charts that give them an indication of how long any particular trend may last. Pennants and flags are chart patterns that show retracements, short-term deviations from the main trend.

With a retracement, no breakout occurs from the support or resistance level, but the security isn’t following the trend, either. Because there is no breakout, the trend is more short-term.

Notice how the support and resistance lines of the pennant (which occur within the support and resistance lines of a much larger trend) converge almost to a point.

In a pennant, support and resistance begin to converge.
In a pennant, support and resistance begin to converge.

The main difference between a flag and a pennant is that the flag’s support and resistance lines are parallel.

A flag, like a pennant, usually indicates falling volume.
A flag, like a pennant, usually indicates falling volume.

Pennants and flags are usually found in the middle of the main phase of a trend, and they seem to last for two weeks before going back to the trendline. They are almost always accompanied by falling volume. In fact, if the trading volume isn’t falling, you are probably looking at a reversal — a change in trend — rather than a retracement.

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