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Flags and Pennants

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  • #165042

    signals20
    Bijdrager

    Flags and Pennants
    Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move.

    Sharp Move: To be considered a continuation pattern, there should be evidence of a prior trend. Flags and pennants require evidence of a sharp advance or decline on heavy volume. These moves usually occur on heavy volume and can contain gaps. This move usually represents the first leg of a significant advance or decline and the flag/pennant is merely a pause.

    Flagpole: The flagpole is the distance from the first resistance or support break to the high or low of the flag/pennant. The sharp advance (or decline) that forms the flagpole should break a trend line or resistance/support level. A line extending up from this break to the high of the flag/pennant forms the flagpole.

    Flag: A flag is a small rectangle pattern that slopes against the previous trend. If the previous move was up, then the flag would slope down. If the move was down, then the flag would slope up. Because flags are usually too short in duration to actually have reaction highs and reaction lows, the price action just needs to be contained within two parallel trend lines.

    Pennant: A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone). The slope is usually neutral. Sometimes there will not be specific reaction highs and lows from which to draw the trend lines and the price action should just be contained within the converging trend lines.

    Duration: Flags and pennants are short-term patterns that can last from 1 to 12 weeks. There is some debate on the timeframe and some consider 8 weeks to be pushing the limits for a reliable pattern. Ideally, these patterns will form between 1 and 4 weeks. Once a flag becomes more than 12 weeks old, it would be classified as a rectangle. A pennant more than 12 weeks old would turn into a symmetrical triangle. The reliability of patterns that fall between 8 and 12 weeks is debatable.

    Break: For a bullish flag or pennant, a break above resistance signals that the previous advance has resumed. For a bearish flag or pennant, a break below support signals that the previous decline has resumed.

    Volume: Volume should be heavy during the advance or decline that forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp move that creates the flagpole. An expansion of volume on the resistance (support) break lends credence to the validity of the formation and the likelihood of continuation.

    Targets: The length of the flagpole can be applied to the resistance break or support break of the flag/pennant to estimate the advance or decline.

    Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation and resumption to augment the robustness of pattern identification.

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    #165050

    evanpattern
    Bijdrager

    WAVE DEGREE
    All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest:
    Grand Supercycle Supercycle Cycle Primary Intermediate Minor Minute Minuette Subminuette
    It is important to understand that these labels refer to specifically identifiable degrees of waves. For instance, whenwe refer to the U.S. stock market’s rise from 1932, we speak of it as a Supercycle with subdivisions as follows:
    1932-1937 the first wave of Cycle degree
    1937-1942 the second wave of Cycle degree
    1942-1966 the third wave of Cycle degree
    1966-1974 the fourth wave of Cycle degree
    1974-19?? the fifth wave of Cycle degree
    Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor and sub-Minor waves. By using this nomenclature, the analyst can identify precisely the position of a wave in the overall progression of the market, much as longitude and latitude are used to identify a geographical location. To say, “the Dow Jones Industrial Average is in Minute wave v of Minor wave 1 of Intermediate wave (3) of Primary wave [5] of Cycle wave I of Supercycle wave (V) of the current Grand Supercycle” is to identify a specific point along the progression of market history.
    When numbering and lettering waves, some scheme such as the one shown below is recommended to differentiate the degrees of waves in the stock market’s progression:

    The most desirable form for a scientist is usually something like 11, 12, 13, 14, 15, etc., with subscripts denoting degree, but it’s a nightmare to read such notations on a chart. The above tables provide for rapid visual orientation. Charts may also use color as an effective device for differentiating degree.
    In Elliott’s suggested terminology, the term “Cycle” is used as a name denoting a specific degree of wave and is not intended to imply a cycle in the typical sense. The same is true of the term “Primary,” which in the past has been used loosely by Dow Theorists in phrases such as “primary swing” or “primary bull market.” The specific terminology is not critical to the identification of relative degrees, and the authors have no argument with amending the terms, although out of habit we have become comfortable with Elliott’s nomenclature.
    The precise identification of wave degree in “current time” application is occasionally one of the difficult aspects of the Wave Principle. Particularly at the start of a new wave, it can be difficult to decide what degree the initial smaller subdivisions are. The main reason for the difficulty is that wave degree is not based upon specific price or time lengths. Waves are dependent upon form, which is a function of both price and time. The degree of a form is determined by its size and position relative to component, adjacent and encompassing waves.
    This relativity is one of the aspects of the Wave Principle that make real time interpretation an intellectual challenge. Fortunately, the precise degree is usually irrelevant to successful forecasting since it is relative degree that matters most. Another challenging aspect of the Wave Principle is the variability of forms, as described through Lesson 9 of this course.

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