What is a pennant chart pattern?
In the world of trading, a pennant is a kind of continuation pattern that is formed when a security undergoes a large scale movement followed by a consolidation period with converging lines. The first phase is known as a flagpole in technical analysis. However, what separates a pennant from a flagpole is the period of consolidation that follows after the large movement. In a pennant, one can observe, in the same direction as the first large movement, a breakout movement that represents the second half of the flagpole. This completes the pennant chart pattern.
Pennant Pattern Characteristics
When trying to identify a pennant pattern in trading, you will see the following three movements.
- A flagpole: This is always the start of a pennant pattern. This also differentiates a pennant pattern from other technical indicators such as a symmetrical triangle, for example. This upward rise denotes the influx of volume and rise in stock price which precedes the pennant.
- Breakout levels: In the case of the pennant, there will be not one but two separate breakouts. One will be at the end of the flagpole itself, and the other will be after the consolidation period preceding the flagpole. Breakouts could be upwards or downward but will continue the trend in one direction.
- The Pennant itself: Coming to the pennant itself, one should observe a triangular shape after the period of consolidation is over. Two converging trend lines should come together to form a triangle, which is the pennant.
How can I spot a pennant formation?
In terms of structure, pennants are quite similar to flags. Both have converged lines that last from anywhere between one to three weeks in their consolidation period. However, to spot a pennant pattern it’s crucial to look at the volume of the trade. During the initial move, the trade will see a lot of influx of volume. This will follow with a period of weakening volume, which is characteristic of the pennant formation. Finally, there will be another large increase in volume signifying a breakout.
As shown in the image mentioned above, the flagpole shows the previous trend as higher. Then pennant formation is observed when the volume reduces as there is a period of consolidation. During this period traders are anticipating a breakout period. That breakout period is when the upper trendline forms a kind of symmetrical triangle.
How to trade with pennant pattern technical analysis?
Pennant trading is all about spotting the formation and then correctly anticipating the breakout point. Following the breakout from a pennant, most traders seek out entering short or long positions. For instance, a pennant trader might observe a bullish pennant forming. Accordingly, she might place a limit on the buying order right above the pennant’s upper trendline. Once the security breaks out of this upper trendline, the trader might look for an above-average volume which confirms the pennant pattern. Once influx of volume is seen, pennant formation is confirmed and she can now hold her position until the security reaches her target price.
Usually, for pennants, the target price is often established by applying the flagpole’s height to the point at which the share’s price exceeds -breaks out- of the pennant. As an example, suppose that the stock price rises from ₹50 to ₹100 as a result of a sharp rally. Then the price of the stock consolidates to ₹85 and finally breaks out of the pennant at ₹90. A trader who wishes to use pennant pattern technical analysis in their trade will look for a target price of ₹50 plus ₹90 equaling ₹140. Accordingly, traders set the stop loss at the pennant chart pattern’s lowest point. A breakdown from these low levels would invalidate the pattern and could mark the start of a long-term reversal in the price.
Traders also often use the pennant pattern technical analysis in conjunction with a variety of other chart patterns. On its own, it is difficult to confirm whether what one is seeing is a pennant, but other indicators can help validate one’s assessment. For example, by using a relative strength index or RSI, one can wait for these levels to moderate in the consolidation phase. This leads to a potentially higher move. In another scenario, the price consolidation may occur close to the trendline’s resistance levels. From here a breakout could create a whole new support level.
