Chart Analysis - Common Chart Patterns - Continuation

Chart Analysis Common Continuation Chart Patterns

1. Flag, Pennant (Short-Term Continuation)
2. Symmetrical Triangle
3. Ascending Triangle
4. Descending Triangle
5. Rectangle
6. Price Channel
7. Measured Move - Bullish
8. Measured Move - Bearish
9. Cup with Handle

• Flag & Pennant (Short-Term Continuation)

Flag and Pennants are very common and reliable short term congestion patterns formed between trends. Flag/pennant are considered to be strong continuation pattern. Flag/pennant differs from each other in their shapes only, other than that they resembles each other so much in their characteristic that the names flag/pennant are used interchangeably. As the name suggest a flag is a rectangular in shape while a pennant is triangular in shape. Flag/pennant gives the buyer very good opportunity to enter the trending market as they represent very short pauses in trends. Composition of Flags and Pennants It consist of two parts: 1.Flag pole: It is the distance between the first support level to the high of the flag/pennant in case of bullish flag/pennant. For bearish flag/pennant it is the distance between the first resistance to the low of flag/pennant.
2.Body: In case of flag the body is a small rectangular pattern that slopes against the trend. The rectangle is formed by two parallel trend lines. For example if the trend was up then it the flag slopes down and vice verse.
In case of pennants the body is a small symmetrical triangle and its wide near the flagpole and tapering towards its end. 

Types of Flags: Depending on the direction of trend they are of two types.

1.Bullish Flag: It is formed in an uptrend. It is a bullish signal confirming that the uptrend may continue further. It is a small pause, where the price is consolidated between the two parallel line forming a rectangle flag, before the pattern continues.

2.Bearish Flag: It is formed in an downtrend. It is a bearish signal confirming that the downtrend may continue further. It is a small pause, where the price is consolidated between the two parallel line forming a rectangle flag, before the pattern continues.

Types of Pennants: It is also of two types depending on the direction of the trend.

1.Bullish Pennants: It is formed in an uptrend. It is a bullish signal confirming that the uptrend may continue further. It is a small pause, where the price is consolidated between the two tapering converging trend line forming a triangle pennant, before the pattern continues. 2.Bearish Pennants: It is formed in an downtrend. It is a bearish signal confirming that the downtrend may continue further. It is a small pause, where the price is consolidated between the two tapering converging trend line forming a triangle pennant, before the pattern continues.

Important Characteristics of Flag and Pennant

Flag/pennant pattern is considered reliable only when they have following characteristics: 1.Prior Trend: Flag/pennant is considered as a continuation pattern only, when there is prior trend before the formation of flag/pennant. 2.Duration: Flag/pennant are considered as a short term continuation pattern. Flag/pennant pattern last form 1 to 12 weeks however if the pattern is longer then the above mentioned period it is considered as rectangle or channel pattern in case of flag. And in case of pennant pattern more than 12 weeks is considered as symmetrical triangle and it will no longer follow pennant characteristic. Ideally formed flag/pennant pattern are 1-4 weeks old. 3.Breakout: It is very important for the confirmation of this pattern. A breakout is supported by huge volumes. Breakout is the confirmation of this pattern the previous trend has resumed. 4.Volume: Volume play a key role in confirming a number of chart pattern same applies here also. As flag/pennant formation develops there is decrease in volume activity while there is increase in volume as the pattern gives breakout. Incorporating volume study with Flag/pennant further strengthen the reliability of this pattern. 5.Price Target: One can roughly place a price target after a breakout, and it should be the height of the flagpole, however other indicators have to considered as well like MACD, Relative Strength Indicator (RSI), etc.
Precautions Taken while considering Flags and Pennants
1.Study based on one technical indicators sometimes gives false signals and proved to be very dangerous. Therefore its always advisable to incorporate other technical study for reconfirmation.
2.Always use a stoploss, its the best strategy to maximize your profit and minimize losses. 

Example of Flag Formed By State Bank Of India Ltd.

Example of Pennant Formed By CESC Ltd.

• Symmetric Triangle Continuation

Symmetric Triangle Chart Pattern

Symmetric Triangles is an another types of triangle chart pattern used by traders. Again like ascending and descending triangle it takes few weeks to few months for this type of pattern to formed. It is also a and it is a continuation pattern of high reliability giving bearish signal in a Downtrend Basics and bullish in an Uptrend Basics. This pattern also consist of four parts: 1. Lower Ascending trend-line: It forms the support and generally have at-least two points, more the better. 2. Upper Descending (falling) trend-line: It forms the resistance in the pattern and have at-least two points, more the better. 3. Base: It is the vertical line drawn between lower trend-line, at which the pattern started to the trend-line opposite to it. The value of base is used to keep the minimum target amount.

4. Apex: It is the point where lower Ascending line and upper Descending line meets. Some traders used apex as the time in which the minimum targets is achieved.

This Trends Basics is formed when there is a good completion between Buyers and sellers, no body is giving up as a result there is formation of lower highs and higher lows. Price continues to move in the direction of the trend. Like other Triangle pattern the breakout is seen before the apex is reached, almost after 2/3 length of the pattern is formed.

With this pattern formation there is a reduction in the Volume, and at the breakout point there is an increase in the volume. Therefore one have to pay attention to the volume movement for further confirmation.
Again integrating this pattern with other technical indicators maximize the profit and increase the confidence in placing yourself at the right position of the market. Similarly one can incorporate studies of MACD, Bollinger etc., to further enhance the pattern reliability and finally the profit.

• Ascending Triangle Continuation 

Ascending Triangle Introduction Ascending Triangle is formed when the stock fluctuates in a band such that upper price range is near its Resistance Basics and and lower price is moving up (higher bottom) continuously and there by reducing the price gap of highs and lows. From Bulls and bears perspective, bulls are continuous trying to move the price up but are facing strong supply at resistance but bears are failing to bring price down. Therefore, the bottom line is continuously moving up forming lower part of triangle or a trend line and upper resistance forms upper portion of the triangle (upper trend-line).

It takes few weeks to few months for Ascending Triangle pattern to formed, Usually it occurred at an Uptrend and it is a continuation pattern of high reliability. This pattern consist of four parts:

1. Upper Horizontal(flat) trend line: It forms the Resistance and generally have at-least two points, more the better.
2. Lower Ascending(rising) trend line: It forms the Support in the pattern and have atleast two points, more the better.
3. Base: It is the vertical line drawn between Upper Horizontal(flat) trend line and lower Ascending trend line, the point at which the pattern started. The value of base is used to keep the minimum target amount.
4. Apex: It is the point where Upper Horizontal(flat) trend line and Lower Ascending(rising) trend line meets. Some traders used apex as the time in which the minimum targets is achieved.
Spotting & Trading Ascending triangle. Ascending triangle is highly reliable pattern when it forms during a uptrend and the direction of breakout is in direction of its original trend, therefore it is a continuation pattern. As mentioned in previous section, upper and lower trend-lines should be formed with
at least two points each. While reliability of this pattern is high, occasional false breakout is also observed at times. Therefore, strict stop loss is advised.

On further analysis of this pattern, it can be seen as an additional confirmation of a trend-line breakout at resistance. Ascending lower line indicates that bears are fast loosing the battle and there is a strong bias towards upward move. Previous uptrend prior to formation of this pattern, tells general sentiments about the equity and tells a small roadblock in uptrend. Although this itself is quite a reliable pattern, there are occasions of false breakout. Therefore it is important to keep a stop loss when trading with this pattern. Also a supporting technical indicator like Volume, Candlestick Basics pattern etc should provide more confidence in decision making.

• Descending Triangle Continuation

Descending Triangle Introduction
Descending Triangles is an another popular chart pattern used by traders. It takes few weeks to few months for this type of pattern to formed Usually it occurred at a Downtrend Basics and it is a continuation pattern of high reliability. This pattern consist of four parts:
1. Lower Horizontal(flat) trend line: It forms the Support Basics and generally have at-least two points, more the better.
2. Upper descending(falling) trend line:It forms the Resistance Basics in the pattern and have atleast two points, more the better.
3. Base: It is the vertical line drawn between lower flat trendline, at which the pattern started to the trend line opposite to it. The value of base is used to keep the minimum target amount.

4. Apex: It is the point where lower horizontal line and upper descending line meets. Some traders used apex as the time in which the minimum targets is achieved.

Descending Triangle also known as bearish descending triangle as they are giving bearish signal with upper trend-lines is descending or falling towards the apex. This trend is formed when the stock is showing a good support at a downtrend and having a continuously lower and lower highs. This is simply because the struggle between the sellers and buyers is being slowly win by the sellers and giving a breakout where the support is broken giving traders a sell signal. Normally the breakout is seen before the apex is reached, almost after 2/3 length of the pattern is formed.

With the descending triangle pattern formation there is a reduction in the Volume, and at the breakout point there is an increase in the volume.Therefore one have to pay attention to the volume movement for further confirmation.

One can also calculate the Breakout range, or the minimum price target for the price movement which should occur after the triangle is completed. It is the same as the height of the triangle.

Again integrating this pattern with other technical indicators maximize the profit and increase the confidence in placing yourself at the right position of the market. Like Pattern formed at the oversold condition further strengthen the sell signal. Similarly one can incorporate studies of MACD, Bollinger etc., to further enhance the pattern reliability and finally the profit.

• Rectangle Continuation

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.

  There are many similarities between the rectangle and the symmetrical triangle. While both are usually continuation patterns, they can also mark trend significant tops and bottoms. As with the symmetrical triangle, the rectangle pattern is not complete until a breakout has occurred. Sometimes clues can be found, but the direction of the breakout is usually not determinable beforehand. We will examine each part of the rectangle and then provide an example with MU.

1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation.
2. Four (4) Points: At least two equivalent reaction highs are required to form the upper resistance line and two equivalent reaction lows to form the lower support line. They do not have to be exactly equal, but should be within a reasonable proximity. Although not a prerequisite, it is preferable that the highs and lows alternate.
3. Volume: As opposed to the symmetrical triangle, rectangles do not exhibit standard volume patterns. Sometimes volume will decline as the pattern develops. Other times volume will gyrate as the prices bounce between support and resistance. Rarely will volume increase as the pattern matures. If volume declines, it is best to look for an expansion on the breakout for confirmation. If volume gyrates, it is best to assess which movements (advances to resistance or declines to support) are receiving the most volume. This type of volume assessment could offer an indication on the direction of the future breakout.
4. Duration: Rectangles can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a flag, also a continuation pattern. Ideally, rectangles will develop over a 3-month period. Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6-month pattern might be expected to exceed its breakout target.
5. Breakout Direction: The direction of the next significant move can only be determined after the breakout has occurred. As with the symmetrical triangle, rectangles are neutral patterns that are dependent on the direction of the future breakout. Volume patterns can sometimes offer clues, but there is no confirmation until an actual break above resistance or break below support.
6. Breakout Confirmation: For a breakout to be considered valid, it should be on a closing basis. Some traders apply a filter to price (3%), time (3 days) or volume (expansion) for confirmation.
7. Return to Breakout: A basic tenet of technical analysis is that broken support turns into potential resistance and vice versa. After a break above resistance (below support), there is sometimes a return to test this newfound support level (resistance level). (For more detail, see this article on support and resistance.) A return to or near the original breakout level can offer a second chance to participate.
8. Target: The estimated move is found by measuring the height of the rectangle and applying it to the breakout.

Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout. Again, it is important to remember that rectangles have a neutral bias. Even though clues can sometimes be gleaned from volume patterns, the actual price action depicts a market in conflict. Only until the price breaks above resistance or below support will it be clear which group has won the battle. 

In the summer of 1999, Micron Electronics (MU) advanced from the high teens to the low forties. After meeting resistance around 42, the stock settled in a trading range between 40 and 30 to form a rectangle.

• The prior intermediate trend was established as bullish by the advance from the high teens to the low forties. However, it was unclear at the time whether or not this trading range would be a reversal or a continuation pattern. The horizontal resistance line at 40 can be extended back to the Feb-99 high and marked a serious resistance level.
  
• The red resistance line at 40 was formed with three reaction highs. The first reaction high may be a bit suspect, but the second two are robust. The parallel support line at 30 was touched three times and established a solid support level. After the high at point 5 was reached, the rectangle was valid.
  
• As the pattern developed, volume fluctuated and there was no clear indication (bullish or bearish break) until mid-February. The first bullish clue came when the stock declined from 38 to 31 and Chaikin Money Flow failed to move below -10%. Money flows held steady throughout the decline and turned positive as soon as the stock turned back up. By the time the stock reached 39 3/4 (surpassing its previous reaction high in the process), CMF was at +20%. Also notice the strength behind the advance after a higher low.
  
• The duration of the pattern was 5 months. Due to long-term overhead resistance at 40, the pattern needed more time to consolidate before a breakout. The longer consolidation made for bigger expectations after the breakout.
  
• The breakout occurred with a large expansion in volume and a large move above resistance.
  
• After the breakout, there was a slight pullback to around 46, but the volume behind the advance indicated a huge breakout. Stocks do not always return to the point of breakout. In the example above, LMT makes a classic return to the breakout. The set up and strength behind the breakout should be assessed to determine the possibility of a second chance opportunity.
  
• The target advance of this breakout was 10 points, which was the width of the pattern. However, judging from the duration and strength of the breakout, expansion of volume and new all-time highs, it was apparent that this was no ordinary breakout. Therefore an ordinary target was useless! After an initial advance as high as 55 13/16, the stock pulled back to 46 and then moved above 70. Another trading range subsequently developed with resistance in the low 70s and support in the upper 40s.

•  Price Channel Continuation

A price channel is a continuation pattern that slopes up or down and is bound by an upper and lower trend line. The upper trend line marks resistance and the lower trend line marks support. Price channels with negative slopes (down) are considered bearish and those with positive slopes (up) bullish. For explanatory purposes, a “bullish price channel” will refer to a channel with positive slope and a “bearish price channel” will refer to a channel with negative slope. 

1. Main Trend Line: It takes at least two points to draw the main trend line. This line sets the tone for the trend and the slope. For a bullish price channel, the main trend line extends up and at least two reaction lows are required to draw it. For a bearish price channel, the main trend line extends down and at least two reaction highs are required to draw it.
   
2. Channel Line: The line drawn parallel to the main trend line is called the channel line. Ideally, the channel line will be based off of two reaction highs or reaction lows. However, after the main trend line has been established, some analysts draw the parallel channel line using only one reaction high or low. The channel line marks support in a bearish price channel and resistance in a bullish price channel.
   
3. Bullish Price Channel: As long as prices advance and trade within the channel, the trend is considered bullish. The first warning of a trend change occurs when prices fall short of channel line resistance. A subsequent break below main trend line support would provide further indication of a trend change. A break above channel line resistance would be bullish and indicate an acceleration of the advance.
   
4. Bearish Price Channel: As long as prices decline and trade within the channel, the trend is considered bearish. The first warning of a trend change occurs when prices fail to reach channel line support. A subsequent break above main trend line resistance would provide further indication of a trend change. A break below channel line support would be bearish and indicate an acceleration of the decline.
   
5. Scaling: Even though it is a matter of personal preference, trend lines seem to match reaction highs and lows best when semi-log scales are used. Semi-log scales reflect price movements in percentage terms. A move from 50 to 100 will appear the same distance as a move from 100 to 200.
   

In a bullish price channel, some traders look to buy when prices reach main trend line support. Conversely, some traders look to sell (or short) when prices reach main trend line resistance in a bearish price channel. As with most price patterns, other aspects of technical analysis should be used to confirm signals.
Because technical analysis is just as much art as it is science, there is room for flexibility. Even though exact trend line touches are ideal, it is up to each individual to judge the relevance and placement of both the main trend line and the channel line. By that same token, a channel line that is exactly parallel to the main trend line is ideal. 

CSCO provides an example of an 11-month bullish price channel that developed in 1999.

• Main Trend Line: The January, February, and March reaction lows formed the beginning of the main trend line. Subsequent lows in April, May, and August confirmed the main trend line.
  
• Channel Line: Once the main trend line was in place, the channel line beginning from the January high was drawn. A visual assessment reveals that these trend lines look parallel. More precise analysts may want to test the slope of each line, but a visual inspection is usually enough to ensure the “essence” of the pattern.
  
• Bullish Price Channel: Subsequent touches along the main trend line offered good buying opportunities in mid-April, late May and mid-August.
  
• The stock did not reach channel line resistance until July (red arrow) and this marked a significant reaction high.
  
• The September high (blue arrow) fell short of channel line resistance, but only by a small margin that was probably insignificant.
  
• The break above channel line resistance in Dec-99 marked an acceleration of the advance. Some analysts might consider the stock overextended after this move, but the advance was powerful and the trend never turned bearish. Price channels will not last forever, but the underlying trend remains in place until proved otherwise.

• Measured Move Bullish (Continuation)

The Measured Move is a three-part formation that begins as a reversal pattern and resumes as a continuation pattern. The Bullish Measured Move consists of a reversal advance, correction/consolidation, and continuation advance. Because the Bullish Measured Move cannot be properly identified until after the correction/consolidation period, it is categorized as a continuation pattern. The pattern is usually long-term and forms over several months. 

1. Prior Trend: For the first advance to qualify as a reversal, there must be evidence of a prior downtrend to reverse. Because the Bullish Measured Move can occur as part of a larger advance, the length and severity of the prior decline may vary from a few weeks to many months.
   
   
2. Reversal Advance: The first advance usually begins near the established lows of the previous decline and extends for a few weeks or many months. Sometimes a reversal pattern can mark the initial trend change. Other times the new uptrend is established by new reaction highs or a break above resistance. Ideally, the advance is fairly orderly and lengthy with a series of rising peaks and troughs that may form a price channel. Less erratic advances are satisfactory, but run the risk of forming a different pattern.
   
3. Consolidation/Correction: After an extended advance, some sort of consolidation or correction can be expected. As a consolidation, there could be a continuation pattern such as a rectangle or ascending triangle. As a correction, there could be 33% to 67% retracement of the previous advance and the possible patterns include a large downward-sloping flag or falling wedge. Generally speaking, the bigger the advance, the bigger the correction. A 100% advance may see a 62% correction and a 50% advance may see only a 33% correction.
   
4. Continuation Advance - Length: The distance from the low to the high of the first advance can be applied to the low of the consolidation/retracement to estimate a projected advance. Some technicians like to measure by points, others in percentage terms. If the first advance was from 30 to 50 (20 points) and the consolidation/correction was to 40, then 60 would be the target of the second advance (50 - 30 = 20 : 40 + 20 = 60). For those who prefer percentages: if the first advance was from 30 to 50 (66%) and the consolidation/correction was to 40, then 66.40 would be the target of the second advance (40 X 66% = 26.40 : 40 + 26.40 = 66.40). The decision of which method to use will depend on the individual security and your analysis style.
   
5. Continuation Advance - Entry: If the consolidation/correction is made up of a continuation pattern, then second leg entry points can be identified using the normal breakout rules. However, if there is no readily identifiable pattern, then some other continuation breakout signal must be sought. In this case, much will depend on your trading style, objectives, risk tolerance and time horizon. One method might be to measure potential retracements (33%, 50%, or 62%) and look for short-term reversal patterns for good reward-to-risk entry points. Another method might be to wait for a break above the reaction high set by the first advance as confirmation of continuation. This method would make for a late entry, but the pattern would be confirmed.
   
6. Volume: Volume should increase at the beginning of the reversal advance, decrease at the end of the consolidation/correction and increase again at the beginning of the continuation advance.
   

The Bullish Measured Move can be made up of a number of patterns. There could be a double bottom to start the reversal advance, a price channel during the reversal advance, an ascending triangle to mark the consolidation and another price channel to mark the continuation advance. During multi-year bull markets (or bear markets), a series of Bullish Measured Moves can form. While the projections for the continuation advance can be helpful for targets, they should only be used as rough guidelines. Securities can overshoot their targets, but also fall short – technical assessments should be ongoing.

Intel (INTC) broke out of a multi-year slump and began a Measured (Bull) Move.

• Prior Trend: After a large downward sloping trading range throughout most of 1997 and 1998, Intel broke above resistance in early November (blue arrows) and started the first leg of a Measured (Bull) Move.
  
• Reversal Advance: The breakout occurred with a strong move above resistance at 22 with 2 weeks of strong volume (green arrows). The advance began from 17.44 and ended at 35.92.
  
• Consolidation/Correction: After an extended advance, the stock declined within a set range that resembled a large descending flag. The decline retraced about 54% of the previous advance.
  
• Continuation Advance - Length: The estimated length of the advance was 18.48 points from the June low at 25.94, which would target 44.42. The actual high was 44.75 for an 18.81 advance.
  
• Continuation Advance - Entry: Because the consolidation/correction portion formed a continuation pattern, entry could have been based on a break above the resistance line (red arrow).
  
• Volume: Volume increased in early November at the beginning of the reversal advance. There was a decrease from March to May 1999. And, volume increased at the beginning of the continuation advance (green arrows).

• Measured Move Bearish (Continuation)

 The Measured Move is a three-part formation that begins as a reversal pattern and resumes as a continuation pattern. The Bearish Measured Move consists of a reversal decline, consolidation/retracement and continuation decline. Because the Bearish Measured Move cannot be confirmed until after the consolidation/retracement period, it is categorized as a continuation pattern. The pattern is usually long-term and forms over several months.

1. Prior Trend: For the first decline to qualify as a reversal, there must be evidence of a prior uptrend to reverse. Because the Bearish Measured Move can occur as part of a larger advance, the length and severity of the prior decline may vary from a few weeks to many months.
   
   
2. Reversal Decline: The first decline usually begins near the established highs of the previous advance and extends for a few weeks or many months. Sometimes this reversal pattern can mark the initial trend change, other times a new downtrend is established by new reaction lows or a break below support. Ideally, the decline is fairly orderly and lengthy with a series of declining peaks and troughs that may form a price channel. Less erratic declines are satisfactory, but run the risk of turning into a different pattern.
   
3. Consolidation/Retracement: After an extended decline, some sort of consolidation or retracement can be expected. As a retracement rally (or reaction rally), prices could recoup 33% to 67% of the previous decline. Generally speaking, the bigger the decline is, the bigger the reaction rally. Some retracement formations might include an upward sloping flag or rising wedge. If the formation turns out to be a consolidation, then a continuation pattern such as a rectangle or descending triangle could form.
   
4. Continuation Decline - Length: The distance from the high to the low of the first decline can be applied to the high of the consolidation/retracement to estimate the length of the next decline. Some technicians like to measure by points, others in percentage terms. If a security declines from 60 to 40 (20 points) and the consolidation/retracement rally returns the security to 50, then 30 would be the target of the second decline (50 - 20 = 30). Using the percentage method, the decline from 60 to 40 would be -33% and projected decline from 50 would be 16.50. (50 X 33% = 16.50 : 50 - 16.5 = 33.50). Deciding which method to use will depend on the individual security and your analysis preferences.
   
5. Continuation Decline - Entry: If the consolidation/retracement forms a continuation pattern, then an appropriate second leg entry point can be identified using traditional technical analysis rules. However, if there is no readily identifiable pattern, then some other signal must be sought. In this case, much will depend on your trading preferences, objectives, risk tolerance and time horizon. One method might be to measure potential retracements (33%, 50% or 62%) and look for short-term reversal patterns. Another method might be to look for a break below the reaction low set by the first decline as confirmation of continuation. This method would make for a late entry, but the Measured (bear) Move pattern would be confirmed.
   
6. Volume: Volume should increase during the reversal decline, decrease at the end of the consolidation/retracement and increase again during the continuation decline. This is the ideal volume pattern, but volume confirmation is not as important for bearish patterns as it is for bullish patterns.
   

More than one pattern can exist within the context of a Bearish Measured Move. A double top could mark the first reversal and decline, a price channel could form during this decline, a descending triangle could mark the consolidation and another price channel could form during the continuation decline.
During multi-year bear markets (or bull markets), a series of Bearish Measured Moves can form. A bear move consisting of three down legs might include a reversal and decline for the first leg, a retracement, a decline for the second leg, a retracement and finally the third leg decline.
While the projection targets for the continuation decline can be helpful, they should only be used as rough guidelines. Securities can overshoot their targets, but also fall short. Technical assessments should be ongoing.

As illustrated in the XIRCOM (XIRC) chart above, the second decline of a Bearish Measured Move may not be as orderly as the first, especially when volatile stocks are involved.

• Prior Trend: After a multi-year bull move, XIRC reached its all-time high at 69.69 on 31-Dec-99.
  
• Reversal Decline: The stock broke trend line support in Jan-00 and a lower low was recorded when the stock dropped below 45 in Feb-00. The decline took the stock to 29.13 in Apr-00 for a total of 40.56 points down.
  
• Consolidation/Correction: In April, May, and June, the stock recouped about 50% of its previous decline with a retracement rally to 52.75. Including the spike high at 52.75, a parallel price channel formed (resembling a large flag) with support marked by the lower trend line. Excluding the spike high, the interpretation could have been a rising wedge. Either way, support was marked by the lower trend line.
  
• Continuation Decline - Length: The estimated length of the continuation decline was 40.56 points from the June high at 52.75, which would target 12.19. Percentage estimates can sometimes be more applicable to Measured (Bear) Moves, especially if the target appears unusually low. The decline from 69.69 to 29.13 was 58%. A 58% decline from 52.75 would mark a target around 22.16 (52.75 x .58 = 30.59 : 52.75 - 30.59 = 22.16).
  
• Continuation Decline - Entry: Because the consolidation/retracement portion formed a continuation pattern, entry could have been based on a break below the support trend line (red arrows).
  
• Volume: Volume increased just prior to the trend line support break in Jan-00 and again when the stock broke below its previous reaction low (blue arrows). Later when the stock broke trend line support in July, volume also increased significantly (red arrows).

• Cup with Handle (Continuation)

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. 

1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
   
   
2. Cup: The cup should be “U” shaped and resemble a bowl or rounding bottom. A “V” shaped bottom would be considered too sharp of a reversal to qualify. The softer “U” shape ensures that the cup is a consolidation pattern with valid support at the bottom of the “U”. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
   
3. 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.
   
4. 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. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.
   
5. 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.
   
6. Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.
   
7. Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
   

As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock's pattern may still capture the essence of the Cup with Handle.

• Trend: EMC established the bull trend by advancing from 10 and change to above 30 in about 5 months. The stock peaked in March and then began to pull back and consolidate its large gains.
  
  
• Cup: The April decline was quite sharp, but the lows extended over a two-month period to form the bowl that marked a consolidation period. Also, note that support was found from the Feb-99 lows.
  
• Cup Depth: The low of the cup retraced 42% of the previous advance. After an advance in June and July, the stock peaked at 32.69 to complete the cup (red arrow).
  
• Handle: Another consolidation period began in July to start the handle formation. There was a sharp decline in August that caused the handle to retrace more than 1/3 of the cup's advance. However, there was a quick recovery and the stock traded back up within the normal handle boundaries within a week. I believe the essence of the formation remained valid after this sharp decline.
  
• Duration: The cup extended for about 3 months and the handle for about 1 1/2 months.
  
• Volume: In early Sept-00, the stock broke handle resistance with a gap up and volume expansion (green arrow). In addition, Chaikin Money Flow soared above +20%.
  
• Target: The projected advance after breakout was estimated at 9 points from the breakout around 32. EMC easily fulfilled this target over the next few months.

Note: Classified these chart patterns as to whether they are typically reversal or continuation patterns, but many can indicate either a reversal or a continuation, depending on the circumstances.