Pennant Pattern: Definition, Types and Strategies

What Is a Pennant Pattern?

A pennant pattern is a continuation chart pattern that traders use to predict future price movements.

It usually shows up after a significant price move, either upward or downward, followed by a brief consolidation period before the trend resumes in the same direction.

This pattern looks like a small symmetrical triangle and is marked by converging trendlines during the consolidation phase.

Pennant patterns are particularly popular among traders because they provide clear entry and exit points.

By waiting for the breakout, traders can reduce the risk of false signals and better align their trades with the prevailing trend.

Formation of the Pennant Pattern

The formation of a pennant pattern involves several key stages, each playing a critical role in shaping this continuation chart pattern.

Flagpole

The formation of a pennant pattern starts with the flagpole, which is the initial sharp price movement.

This movement can be a rapid surge (for a bullish pennant) or a steep decline (for a bearish pennant). The flagpole sets the stage by establishing the direction of the trend.

Resistance and Support

Following the flagpole's creation, the market enters a consolidation phase, during which the price starts to move sideways.

During this phase, two key trendlines emerge: resistance and support.

• Resistance: The upper trendline connects the highs during the consolidation phase. It represents the price level at which selling pressure prevents further upward movement.

• Support: This lower trendline connects the lows during the consolidation phase. It represents the price level at which buying pressure prevents further downward movement.

These converging trendlines give the pennant pattern its characteristic symmetrical triangle shape.

Breakout

The final stage of the pennant pattern is the breakout.

This occurs when the price moves decisively beyond the resistance or support trendline, signaling the end of the consolidation phase and the resumption of the previous trend.

In a bullish pennant, the breakout happens above the resistance line, indicating that buyers have regained control and the upward trend continues.

In a bearish pennant, the breakout occurs below the support line, indicating that sellers have taken charge and the downward trend is resuming.

Types of Pennant Patterns

There are two types of pennant patterns: bullish pennant patterns and bearish pennant patterns.

Bullish Pennant Pattern

A bullish pennant pattern emerges after a strong upward price movement.

This pattern suggests that the initial upward trend will continue after a brief period of consolidation.

Here’s a breakdown of the bullish pennant pattern:

1. Flagpole: The pattern starts with a significant upward price movement, often driven by positive news, increased buying interest, or strong market momentum.

2. Consolidation Phase: Following the flagpole, the price enters a consolidation phase, where it trades within a narrowing range. During this phase, the price creates a series of lower highs and higher lows, forming a small symmetrical triangle. The upper trendline acts as resistance, while the lower trendline serves as support.

3. Breakout: The bullish pennant pattern completes with a breakout above the resistance trendline. This breakout signals the consolidation phase's end and the upward trend's continuation.

Bearish Pennant Pattern

A bearish pennant pattern forms after a sharp downward price movement, indicating that the initial downtrend will likely continue after a brief consolidation.

Here’s a closer look at the bearish pennant pattern:

1. Flagpole: The pattern begins with a significant downward price movement, often triggered by negative news, increased selling pressure, or weak market sentiment.

2. Consolidation Phase: After the flagpole, the price enters a consolidation phase, trading within a narrowing range. During this period, the price creates a series of higher lows and lower highs, forming a small symmetrical triangle. The upper trendline acts as resistance, while the lower trendline serves as support.

3. Breakout: The bearish pennant pattern completes with a breakout below the support trendline. This breakout indicates the end of the consolidation phase and the continuation of the downward trend.

Identifying the Pennant Pattern

Identifying pennant patterns involves recognizing several key elements that mark the formation of this continuation chart pattern. Here are the essential points to look for:

• Flagpole:

  • Look for a sharp, significant price movement that creates the initial trend direction.

  • This movement could be an upward surge or a downward drop, forming the base of the pennant pattern.

• Consolidation Phase:

  • During this phase, the price movement slows down and starts to trade within a narrowing range.

  • This range is characterized by converging trendlines, creating the symmetrical triangle shape of the pennant.

• Resistance Trendline:

  • Identify the upper trendline formed by connecting the highs during the consolidation phase.

  • This line acts as resistance, preventing the price from moving higher.

• Support Trendline:

  • Identify the lower trendline formed by connecting the lows during the consolidation phase.

  • This line acts as support, preventing the price from moving lower.

• Breakout Point:

  • The pattern completes with a breakout, where the price moves beyond the resistance (in a bullish pennant) or support (in a bearish pennant) trendline.

  • The breakout signals the end of the consolidation phase and the continuation of the previous trend.

• Symmetrical Triangle Shape:

  • Ensure the consolidation phase forms a small symmetrical triangle with converging trendlines.

  • This shape distinguishes the pennant pattern from other continuation patterns like flags and symmetrical triangles.

Pennant Patterns vs. Symmetrical Triangles

Symmetrical triangles and pennant patterns can appear similar, but their contexts differ.

A symmetrical triangle can occur as both a continuation and a reversal pattern and typically forms over a longer period.

Pennant patterns, however, are specifically continuation patterns that follow a sharp price movement and a brief consolidation phase.

Pennant Patterns vs. Flag Patterns

While both pennant and flag patterns are continuation patterns, they differ in appearance.

A flag pattern features parallel trendlines during consolidation, forming a rectangle that slopes against the prevailing trend.

In contrast, a pennant pattern has converging trendlines, forming a small symmetrical triangle.

Strategies for Trading the Pennant Pattern

Here are some practical strategies to trade pennant patterns:

1. Breakout Strategy: Enter the trade when the price breaks out of the pennant. For bullish pennants, buy when the price breaks above the upper trendline. For bearish pennants, sell when the price breaks below the lower trendline.

2. Volume Confirmation: Use volume to confirm breakouts. A breakout with increasing volume is more reliable.

3. Risk Management: To minimize potential losses, set stop-loss orders just outside the pennant's opposite trendline. Calculate take-profit targets based on the flagpole's height.

4. Combining Indicators: Enhance your strategy by combining pennant patterns with other technical indicators, such as moving averages or the Relative Strength Index (RSI).

Conclusion

Pennant patterns offer traders a reliable method to predict the continuation of trends. These patterns form after a significant price movement, followed by a brief period of consolidation within converging trendlines, creating a small symmetrical triangle.

Understanding the formation, types, and strategies for trading pennant patterns can enhance your trading performance and make more informed decisions. Join XS today and start trading!