Chartered Market Technician (CMT) Practice Exam

The flag or pennant pattern is classified as a continuation pattern because it typically appears after a strong price movement, either upward or downward, and suggests that the prevailing trend is likely to resume after a brief consolidation period.

Flags are characterized by a strong price movement followed by a small rectangular formation that slopes against the prevailing trend. Pennants look similar but have converging trendlines that create a symmetrical triangle shape. These patterns indicate a pause in the market, where traders are consolidating, before the previous trend resumes.

Traders see these charts as signals to enter trades in the direction of the prevailing trend, with an expectation that the momentum generated prior to the formation of the pattern will carry on after the price breaks out of the flag or pennant. This expectation is based on the market psychology that during the consolidation phase, the buyers and sellers are momentarily balancing, but the existing trend is still in play.