How to Use Triangle, Flag, Pennant, Wedge, and Gap Patterns to Analyze Stocks
The language of technical analysis for stock investors, chart patterns can increase the odds that an analyst correctly predicts what will happen with a particular stock.
A triangle is formed when the resistance line and the support line converge to form the triangle point that shows a general direction in the stock’s price movement. There are three types of triangles: symmetrical, ascending, and descending.
Symmetrical: The symmetrical triangle points sideways, which tells you it’s a horizontal pattern that becomes a setup for a move upward or downward once more price movement provides a bullish or bearish indicator.
Ascending: The ascending triangle is a bullish pattern.
Descending: The descending triangle is bearish.
Of course, if you see a divergent trapezoidal and octagonal candlestick formation supported in a bowl-shaped isosceles triangle, do nothing! Just take two aspirin and try again tomorrow.
Flag and pennant patterns
Flags and pennants are familiar chart patterns that are short-term in nature (usually not longer than a few weeks). They’re continuation patterns that are formed immediately after a sharp price movement, which is usually followed by a sideways price movement. Both the flag and the pennant are similar except that the flag is triangular whereas the pennant is in a channel formation.
The wedge pattern can be either a continuation or reversal pattern. It seems to be much like a symmetrical triangle, but it slants (up or down), whereas the symmetrical triangle generally shows a sideways movement. In addition, the wedge forms over a longer period of time (typically three to six months).
A gap in a chart is an empty space between two trading periods. This pattern occurs when the difference in the price between those two periods is substantial. Say that in the first period, the trading range is $10 to $15. The next trading session opens at $20. That $5 discrepancy will appear as a large gap between those two periods on the chart.
These gaps are typically found on bar and candlestick charts. Gaps may happen when positive (or negative) news comes out about the company, and initial buying pressure causes the price to jump in the subsequent period as soon as trading commences.
There are three types of gaps: breakaway, runaway, and exhaustion. The breakaway gap forms at the start of a trend, and the runaway gap forms during the middle of the trend. So what obviously happens when the trend gets tired at the end? Why, the exhaustion gap of course! See, this stuff isn’t that hard to grasp.