Certain patterns and formations identified within price charts can indicate future movement with accuracy. Three of the most common are flags, pennants and triangles or wedges.

Normal price action as the underlying moves up or down creates these patterns. Periods of consolidation or rest occur after rallies or declines have moved over time. Clues given by the size, shape, location and duration of such patterns allow us to anticipate and measure future price action.

A "flag" is described by having price action contained within two slanting, parallel lines for a short duration. The "flagpole" is considered to run from the highest upper and lower corners of the formation. A flag flying from left to right is a bull flag while a flag flying from right to left is a bear flag.

Flagpole on the left = bull flag. Flagpole on the right = bear flag. This becomes second nature as you picture flags on a chart hanging from their poles in your mind.

A "pennant" formation is akin to flags but the upper & lower lines are shaped more to a point instead of rectangular. The same principle applies concerning 'flight' direction and pole position.

Triangles and wedges are formations that may develop over long periods of time. Price action consolidates into tight ranges that shape different style forms.

An ascending triangle or wedge will have a rising lower line of support with a flat (or nearly so) upper resistance line. This happens when prices continue to make higher lows as buyers prevent sellers from keeping prices down. An eventual break in

Descending triangles or wedges are just the opposite. Continuous lower highs create a declining upper line as sellers gradually push price action down. A breakout of this pattern is favored to the downside.

Symmetrical wedges have nearly equal upper and lower trendlines. An equity making higher lows and lower highs is squeezed towards the point where a breakout can move to either direction. There is a slight bias in the wedge breakout favoring a move that continues prior market direction, but astute traders wait for confirmation before entering new trades.

Future price targets can be predicted with uncanny accuracy by measuring certain parts of a formation and projecting that into the breakout's direction.

Technicians measure a distance in price during the first leg of a flag or pennant and add that price or point total to the breakout mark for a target the move should hit or follow through to. Measuring the widest gap in a triangle or wedge, gives a sum total of price or points that the new move should reach when applied to the breakout mark. The following examples should help clarify this.

Let's explore some formations on weekly, daily and hourly charts:

(daily chart, PDLI)

Protein Design Labs Inc. formed a bull flag that hangs from left to right. The left "leg" of the flag measured from a high near $120 to a low of $55. That is a $65 spread we expect to cover if the price breaks out soon. Sure enough, prices break out at $80, move up to $90 and pull back several times before reaching the target of $145 (65 + 80 = 145).

(hourly chart, PDLI)

On the hourly chart, PDLI clearly broke the wedge picture above near the $160 level. Considering this wedge has a distance of $40 measured from the widest part, we project the stock to reach the $200 range from there (40 + 160 = 200)

(weekly chart, Dow)

What appeared to be a "bear flag" hanging from right to left failed to breakout on the downside. A failed formation is a very strong indicator of market strength to the direction of the failure, as witnessed here in the Dow. If we measure the two bull flags we'll find they both reached the projected price targets.

The symmetrical wedge on the Dow spans an incredible 2,000 points! Time will tell if that projected target is hit when the index eventually breaks out and runs.

(hourly chart, MSFT)

Microsoft formed an ascending bullish wedge after falling to new recent lows for the issue. All those higher lows proved eager buyers were out-muscling the sellers. The breakout from here suggests continued moves to the upside.

(chart, RTRSY)

Reuters Group PLC showed a bearish pennant hanging right to left and a bearish flag as well. Can you envision the flagpoles? Did each formation reach the price point it forecast from point of breakout?

Undoubtedly, these chart formations are essential for all traders to identify. They help forecast future direction and also moves within larger trend ranges. Formations can help predict price target and distance as well. Become adept at spotting them in your chart applications and enjoy the advantage they provide.