There are many traders who would not agree with this. Example ANZ is in the middle of a strong up-trend. Two flags are marked on the chart. Lines through the peaks and the lines through the troughs are parallel and counter to the direction of the trend. A flag forms with parallel lines counter to the down-trend. Try to identify the flag or pennant between and .
This will give you an idea of how subjective pattern identification can be. The last pattern is a pennant. Pennants Pennants are really short-term triangles. The upper and lower lines converge to form a short-term triangle, completed by price gapping above the upper pennant line. Volume Confirmation Volume normally expands at the start of the flag or pennant, contracts as the pattern develops and then expands on the breakout. The targeted move is measured from the high of the lowest day in the “V” bottom.
The upper boundary of the targeted move is the highest high recorded within the pennant. The first school will enter a trade at the point of breakout and place a stop-loss one tick outside the opposite trendline. In an up-trend, the trade is entered on a break above the upper flag or pennant line. In a down-trend, the trade is entered on a break below the lower flag or pennant line, with a stop placed one tick above the upper flag or pennant line, opposite the breakout point. The second school will enter a trade before the breakout point, while the pattern is still forming. Their reasoning is that the patterns are normally reliable and early entry means lower risk, as the stop is closer to the entry point. This is only makes sense for pennants, not for flags where there is no technically reliable point to place a stop-loss.
A pennant forms below resistance at 5. The stock encounters resistance at before making a further trough in September – a promising double bottom. A pennant forms below the resistance line – a strong bullish signal as the stock has entered a congestion pattern rather than a correction. The breakout at is in the opposite direction to that expected. Within 4 days the breakout has turned into a bear trap, with a break above the pennant at . A larger pennant forms straddling the resistance line – another strong bullish signal. A long position is entered on day , when price respects the bottom trendline.