Like reversal models, continuation models are formed during periods of unstable equilibrium in the market, which appears when forces of bulls and bears are approximately equal. As a result, the price stops moving in the trend direction and fluctuates in some range. Continuation models appearance usually means that the period of the price standstill reflected in the graph is nothing else that a pause in the prevailing trend development, and that the trend direction will remain the same after the period is finished. This feature distinguishes such models from reversal models discussed before, because the latter usually reflect the main trend reversal.

Another criterion of difference between reversal and continuation models is duration of their formation. The former ones, showing crucial changes in price dynamics, are usually formed for longer time. As for trend continuation models, they are less long. Currently it is accepted to point out the following major continuation models:

Triangles

Flags

Pennants

Triangles

If the occurring price consolidation can be limited with the support and the resistance lines, crossing “in the future” (to the right from the current price), the model formed is called “Triangle”. Depending on the lines arrangement, there are symmetrical triangle, ascending triangle, descending triangle and expanding triangle-,see Figure 1.

For the model drawing it is required minimum two points for resistance and two points for support. According to Elliott` s wave theory, it is required three points to draw the upper line of the triangle and three points to draw the lower line (you can read more details about the theory in the relevant literature). Although originally it was accepted to call triangle a continuation model, today many analysts share the opinion that this model can be more appropriately described as “neutral”. It means that, as experience shows, a price breakthrough can occur both in the direction of the current trend and against it. It is the same situation as when the further direction of the market is not determined yet. However, it is not worth worrying because of the seeming certainty. As we have written before, while working with any price model, our challenge is to wait till a clear price range is formed to join the movement.

Fig.1 – Triangles Diagram

 ΰ) Ascending triangle is formed with the horizontal resistance line and the ascending support line. This model reflects the situation when demand is stronger than supply, bulls are stronger than bears. This type of model is usually broken upwards.

b) Descending triangle is formed with the horizontal support line and the descending resistance line. The model reflects the situation when supply exceeds demand, bears are stronger than bulls. The price breakthrough downwards is expected.

c) Symmetrical triangle looks as follows: the upper triangle line is descending, while the lower line is ascending. The model demonstrates temporary equality of bulls` and bears` strengths in the market. The price is usually broken in the direction of the previous trend.

d) Expanding triangle is the mirror reflection of any described above triangle kind and shows increased volatility in the market. Market participants are seized with their emotions, but there is no apparent prevailing trend. It is the most difficult type of triangle to apply while trading.

As the price fluctuation range gets narrower inside the triangle, the trade volume must decrease.  Such a trend of the volume reduction is common for all consolidation models. However, it must grow sufficiently after crossing the trend line completing the model. Price must move back at small volume, growing again when the trend is resumed.

It takes some time to complete the model, and the time is determined with the point of the two lines convergence, i.e. the triangle top. As a rule, the price breakthrough should be directed as the previous trend, at the distance from ½ to ¾ of the triangle horizontal line– Fig. 2. If the prices are inside the triangle, behind the point located at the distance of ¾ of the length, the model is beginning to lose its potential. It means that prices will continue their uncertain movement towards the triangle top, then they will go beyond the triangle limits. A model completion signal is given, when the closing price breaks one of the trend lines. Sometimes after a breakthrough the price returns to the trend line. Depending on the trend direction (ascending or descending) this line becomes the support or the resistance line respectively.

Fig.2 – the triangle breakthrough has occurred at the distance of from ½ to ¾ of the triangle horizontal length, which confirms its strength.

The triangle breakthrough can be considered completed, if the closing price has fixed itself beyond the limits of the consolidation relevant line (i.e. either below or above one of the triangle sides). A simple cross-over of the side with the graph candle will surely give a false signal. After the triangle breakthrough, the price often moves back towards the side broken.

For triangles measuring, special methods exist. The simplest way is to measure the height of the widest part of the model (the base) and to set the distance either from the breakthrough point or from the top. Another way consists in drawing a channel line parallel to the support line (for the bull triangle) or to the resistance line (for the bear triangle), which will be the minimal price guiding point– Fig. 3.

Fig. 3 – the first way: measure the widest vertical part of the triangle (the base – line A) and then set line B from the breakthrough point. The second way: set a line parallel to the resistance line, (upper triangle line).

Flags and Pennants

The models of flags and pennants mark short pauses in dynamically developed trends. Formation of these models in the graph should follow steep and almost straight line of the price movement. They are common for markets, which as if are overtaking themselves in their development upwards or downwards, and therefore they should stop and have a rest for some time before continuing the movement in the former direction.  

The ways of drawing of these two models are almost the same. The flag looks like a parallelogram or a rectangle, limited with two parallel trend lines with some inclination, as a rule, from the direction of the prevailing trend movement. It means that with the descending trend, a flag must be directed a little upwards, while with the ascending trend a flag must be directed downwards.  

The model of pennant is distinguished with two converged trend lines and more horizontal layout. Pennant looks like a small symmetric triangle. Both of the models are formed on the background of gradual reduction of trading volume, but after the support (resistance) line breakthrough , the volume sharply grows– Fig. 4.

Fig. 4. Flag and pennant

Sometimes the flag “cloth” is inclined towards the trend direction. In this case, the predicting strength of the model reduces, and the trend reversal frequently occurs instead of its continuation. A flag with “cloth” arranged horizontally is called “rectangle”.

Calculation of flags and pennants is simple. Minimal (pessimistic) estimations are faced like in situations with triangles: a flag “cloth” is already a channel, the channel can be drawn by the pennant top (descending beginning). If we set its width, we get minimal estimation of breakthrough. Maximal (optimistic) estimation is based on the assumption that flags and pennants “fly up from the flagpole to the half of the stick length”. It means that such trend continuation models usually emerge approximately in the middle of the movement – Fig. 5.

Fig. 5 – the minimal target is the channel width – marked with the red line. The main part is calculated basing on the assumption that the flag is in the middle of the way

Practical Aspects at Work with Price Models

Always remember that any model is a pause in the movement (except thorn). As traders, we wonder:

1.Where the price moves after the pause

2.How intensively the price moves after the pause.

A price model breakthrough is a breakthrough of a resistance or a support line. If we can see that the price flies out like a cork from a bottle of Champaign, it reveals that the market has chosen its direction. The movement intensiveness can be determined by its speed - the distance passed in points divided by a time unit, or by the candle body after a breakthrough on the candle formation. If the body is big, it means that the breakthrough is confident. If the candle has a small body or big shadows, it means that there is no obvious certainty.

In addition, while studying the models, always mind support and resistance lines. They are more essential than the predicting target according to a price model, and if a resistance/ support level is located in the way to the target, it is better to fix the profit at the resistance/ support level or move the Stops following the profit.

In price models discerning, there is the danger to see them much more frequently than they really exist. As your experience is gained, you will be able to turn this subjectivism in your favour. It is required to apply only those price models which can be used with success. Finally, let us remember an important trading saying once more: “A model must be seen with naked eye”.  

Alex Sabodin. Pro Finance Group Inc.