Pennants and flags are very similar in terms of structure, and it may take some practice before an investor can readily tell the difference between the two. These short-term patterns that last only a two to three weeks in length can be indicated by an initial large volume move followed by a tapering off period then another strong volume increases at the end as the break out occurs.
Investors can use this pattern to help figure out how high the stock will advance by taking the price at the bottom of the “flag pole” in the initial pattern, then waiting until the price consolidates. Once consolidated it will break out at a slightly higher level and if you take the price at the bottom and add it to the break out price, this will give an excellent indication of the price possibilities on top out for the pattern.
For instance, if you have a stock whose price at the base of the “flag pole” was $10 and it rose aggressive to $20, then consolidated to $18.50 where it sits for a while before breaking out at $19.00. Investors can figure the approximate top for this pattern by taking the initial $10 and adding it to the $19.00, which gives one a $29.00 target to hit for price on this stock for this particular pattern. Typically, investors will use this pattern in conjunction with other indicators to boost their chance at an accurate forecast.