A pennant formation is a very strong short term continuation pattern, one of the most reliable. The pattern represents a brief pause in the current trend followed by a continuation of the previous trend. Pennants are also said to fly “half mast” which means they represent the midpoint of a trend, which makes price projection quite easy.
A pennant can be thought of as a smaller version of a symmetrical triangle. It has the same shape as a symmetrical triangle and follows the same pattern in volume. The main differences between the two are time and price action.
A pennant is a relatively short term pattern that forms in about 1 to 3 weeks time as opposed to the 1 to 3 months it takes a symmetrical triangle to form. A pennant is also formed in a different manner than a symmetrical. A symmetrical forms with just a regular previous uptrend whereas a pennant forms on a large almost vertical spike in price.
The pennant pattern is fun to trade, easy to identify and one that I often look for to make quick money. Pennant trades are for short-term (swing) traders, not for buy-and-hold investors. There are four main identification guidelines when it comes to pennants. Here they are:
1.) Price is bounded by an upper and lower trend line. The price here usually goes against the trend: The price will rise in a downtrend and fall in an uptrend.
2.) Three-week Maximum. Pennants are short term patterns and thus should not last more than 3 weeks. Even three weeks is really pushing it. I prefer pennants to last only seven to eleven days. Longer than 3 weeks and the pattern turns into a symmetrical triangle or wedge.
3.) Steep, quick price trend. Pennants should have a very steep price move (up or down) leading into the pattern.
4.) Downward volume trend. Volume will usually trend downward until the break out move occurs.
Bearish Pennants
A Pennant (Bearish) follows a steep, or nearly vertical fall in price, and consists of two converging trendlines that form a narrow, tapering flag shape. The Pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.
Aside from its shape, the Pennant is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.
Bearish Pennant is a sharp, strong volume decline on a negative fundamental development, several days of narrowing price consolidation on much weaker volume followed by a second, sharp decline to new lows on strong volume. The technical target for a bearish pennant pattern is derived by subtracting the height flag pole from the eventual breakout level at point.
Bearish pennant formations involve two different parts, a near vertical, high volume flag pole and a symmetrical, low volume triangular consolidation comprised of four points and a downside breakout.
Bullish Pennant
A Pennant (Bullish) follows a steep, or nearly vertical rise in price, and consists of two converging trendlines that form a narrow, tapering flag shape. The Pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.
Apart from its shape, the Pennant is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.
A bullish pennant are signals that bulls are about to go a-chargin’ again. This means that the sharp climb in price would resume after that brief period of consolidation, when bulls gather enough energy to take the price higher again.
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