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Certified Financial Technician(CFTe) Continuation Patterns.pptx
- 1. Certified Financial Technician(CFTe) ProfessionalCourse Continuation patterns: 1. Triangles 1.1 Symmetrical Triangles 1.2 Ascending Triangles 1.3 Descending Triangles While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout.
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- 3. Certified Financial Technician(CFTe) ProfessionalCourse Trend: In order to qualify as a continuation pattern, an established trend should exist. The trend should be at least a few months old and the symmetrical triangle marks a consolidation period before continuing after the breakout. Four (4) Points: At least 2 points are required to form a trend line and 2 trend lines are required to form a symmetrical triangle. Therefore, a minimum of 4 points are required to begin considering a formation as a symmetrical triangle. The second high (2) should be lower than the first (1) and the upper line should slope down. The second low (2) should be higher than the first (1) and the lower line should slope up. Ideally, the pattern will form with 6 points (3 on each side) before a breakout occurs. Volume: As the symmetrical triangle extends and the trading range contracts, volume should start to diminish. This refers to the quiet before the storm, or the tightening consolidation before the breakout. Duration: The symmetrical triangle can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a pennant. Typically, the time duration is about 3 months.
- 4. Certified Financial Technician(CFTe) ProfessionalCourse Breakout Timeframe: The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern's development or time-span. The time-span of the pattern can be measured from the apex (convergence of upper and lower lines) back to the beginning of the lower trend line (base). A break before the 1/2 way point might be premature and a break too close to the apex may be insignificant. After all, as the apex approaches, a breakout must occur sometime. Return to Apex: After the breakout (up or down), the apex can turn into future support or resistance. The price sometimes returns to the apex or a support/resistance level around the breakout before resuming in the direction of the breakout. Price Target: There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the symmetrical triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the pattern's trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target.
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- 7. Certified Financial Technician(CFTe) ProfessionalCourse The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation Top Horizontal Line: At least 2 reaction highs are required to form the top horizontal line. The highs do not have to be exact, but they should be within reasonable proximity of each other. There should be some distance between the highs, and a reaction low between them. Lower Ascending Trend Line: At least two reaction lows are required to form the lower ascending trend line. These reaction lows should be successively higher, and there should be some distance between the lows. If a more recent reaction low is equal to or less than the previous reaction low, then the ascending triangle is not valid.
- 8. Certified Financial Technician(CFTe) ProfessionalCourse Duration: The length of the pattern can range from a few weeks to many months with the average pattern lasting from 1-3 months. Volume: As the pattern develops, volume usually contracts. When the upside breakout occurs, there should be an expansion of volume to confirm the breakout. While volume confirmation is preferred, it is not always necessary. Return to Breakout: A basic tenet of technical analysis is that resistance turns into support and vice versa. When the horizontal resistance line of the ascending triangle is broken, it turns into support. Sometimes there will be a return to this support level before the move begins in earnest. Target: Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and applying it to the resistance breakout.
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- 11. Certified Financial Technician(CFTe) ProfessionalCourse • The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution. • Lower Horizontal Line: At least 2 reaction lows are required to form the lower horizontal line. The lows do not have to be exact, but should be within reasonable proximity of each other. There should be some distance separating the lows and a reaction high between them. • Upper Descending Trend Line: At least two reaction highs are required to form the upper descending trend line. These reaction highs should be successively lower and there should be some distance between the highs. If a more recent reaction high is equal to or greater than the previous reaction high, then the descending triangle is not valid.
- 12. Certified Financial Technician(CFTe) ProfessionalCourse • Duration: The length of the pattern can range from a few weeks to many months, with the average pattern lasting from 1-3 months. • Volume: As the pattern develops, volume usually contracts. When the downside break occurs, there would ideally be an expansion of volume for confirmation. While volume confirmation is preferred, it is not always necessary. • Return to Breakout: A basic tenet of technical analysis is that broken support turns into resistance and vice versa. When the horizontal support line of the descending triangle is broken, it turns into resistance. Sometimes there will be a return to this newfound resistance level before the down move begins in earnest. • Target: Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and subtracting it from the resistance breakout.
- 13. Certified Financial Technician(CFTe) ProfessionalCourse 3. Rectangles
- 14. Certified Financial Technician(CFTe) ProfessionalCourse • A Rectangle is a continuation pattern that forms as a trading range during a pause in the trend. The pattern is easily identifiable by two comparable highs and two comparable lows. The highs and lows can be connected to form two parallel lines that make up the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas. • One important clue to watch for is the volume pattern. Because the price swings in both directions are fairly broad, the analyst should keep a close eye on which moves have the heavier volume. If the rallies are on heavier and the setbacks on lighter volume, then the formation is probably a continuation in the uptrend. If the heavier volume is on the downside, then it can be considered a warning of a possible trend reversal in the works.
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- 16. Certified Financial Technician(CFTe) ProfessionalCourse • 4. Flags and Pennants • are a 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.
- 17. Certified Financial Technician(CFTe) ProfessionalCourse • 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 3 weeks.
- 18. Certified Financial Technician(CFTe) ProfessionalCourse • 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.
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- 20. Certified Financial Technician(CFTe) ProfessionalCourse • As a summery: They are both preceded by an almost straight line move (called a flagpole) on heavy volume. Prices then pause for about one to three weeks on very light volume. The trend resumes on a burst of trading activity. Both patterns occur at about the midpoint of the market move. The pennant resembles a small horizontal symmetrical triangle. The flag resembles a small parallelogram that slopes against the prevailing trend. Both patterns take less time to develop in downtrends.
- 21. Certified Financial Technician(CFTe) ProfessionalCourse • 5. The wedge formation • 5.1 Rising wedge formation • 5.2 Falling wedge formation
- 22. Certified Financial Technician(CFTe) ProfessionalCourse it is identified by two converging trend-lines that come together at an apex. In terms of the amount of time it takes to form, the wedge usually lasts more than one month but not more than three months, putting it into the intermediate category. What distinguishes the wedge is its noticeable slant. The wedge pattern has a noticeable slant either to the upside or the downside. As a rule the wedge slants against the prevailing trend. Therefore, a falling wedge is considered bullish and a rising wedge is bearish. the bullish wedge slants downward between two converging trendlines The bearish wedge slants upward between two converging trendlines
- 23. Certified Financial Technician(CFTe) ProfessionalCourse 6. Cup with handle The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O'Neil and introduced in his 1988 book, ”how to make money in stocks” As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right-hand side and the handle is formed. A subsequent breakout from the handle's trading range signals a continuation of the prior advance.
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- 25. Certified Financial Technician(CFTe) ProfessionalCourse Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow Theory. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback. Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.