Flag and pennant patterns represent areas of consolidation on a trading trend chart. In a series of higher highs and higher lows, these patterns form the basis for the higher lows. In other words, the higher lows are made of flag and pennant patterns.

A pennant pattern looks like, well, a pennant. Support and resistance lines converge into a point forming what looks like a small pennant shape. A flag pattern, on the other hand, is bounded by parallel lines. All these patterns almost always fly counter to the prevailing trend, but the direction in which they’re flying is not actually a requirement.

[Credit: Chart courtesy of StockCharts.com]
Credit: Chart courtesy of StockCharts.com

The key for each of these patterns is the breakout. If the breakout from the formation is in the direction of the established trend, then the trend continues. If not, then the trend may be over.

Flags and pennants typically are associated with a trend, but you may also see these patterns within the confines of a trading range. A flag or pennant forming near the top of a trading range hints of an eventual breakout.

The flag or pennant pattern shows the stock consolidating near the top of the trading range, and that suggests that selling pressure is diminishing and the stock is preparing to test the zone of resistance.