A Flag or a Pennant forms during sideways consolidation, a continuation pattern that typically occurs after a strong price movement, either upwards (bullish) or downwards (bearish).
(Fig 5.1 - Flag and Pennant)
The Flag Pattern resembles a rectangular shape that slopes against the preceding trend. It consists of price action contained between two parallel trend lines representing the upper and lower boundaries, usually close to each other.
The Flag Pattern forms as a brief consolidation phase, a short term pattern, following a sharp price movement. The breakout from a Flag Pattern usually occurs in the direction of the preceding trend. However, it may also break in the opposite direction signalling a reversal. Usually, a breakout following a short consolidation is more reliable. The longer the sideways consolidation, higher the chances of false breakouts and/or a reversal.
The Pennant Pattern is similar to a flag but has converging trend lines instead of parallel lines. It typically forms a small symmetrical triangle shape.
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