Pennants are chart patterns that suggests a continuation of a previous trend. They are characterized by a symmetrical triangle shape, often following a sharp price movement.

The pattern gets its name from a real pennant which is a flag with a tapered or triangular end.

Pennants, just like flags, have converging trend lines during their consolidation period. They could normally last between one and three weeks. However, they should not be confused with the flag pattern as they structures differ.

Read more about the flag pattern here

Understanding the Pennants

Pennants are usually seen as an evidence of momentary pause or consolidation in the market. This consolidation period shows market indecision, where buyers and sellers are unsure of the next move to make.

Pennants are also used as continuation patterns, suggesting that the existing trend is likely to resume after the consolidation period. This is particularly important for traders who are looking to capitalize on ongoing trends.

The breakout from the pennant can often signal a renewed surge in momentum, indicating a continuation of the trend. Hence, it is a valuable tool for identifying potential profit opportunities.

Many traders enter new long or short positions after a stock breaks out of a pennant chart pattern. For example, a trader might notice a bullish pennant forming and place a limit buy order slightly above the upper trendline. If the stock breaks out with above-average volume, the trader might hold the position until it reaches its price target.

Features of a Pennant Pattern:

1. Initial Trend: A strong, well-defined uptrend or downtrend precedes the pennant formation. The trend should be clear and sustained, indicating a significant price movement in a particular direction.
2. Flagpole: The flagpole is the initial portion of the trend that leads up to the pennant formation. It represents the momentum or strength of the trend.
3. Consolidation: The price enters a period of sideways trading, forming a symmetrical triangle shape. This consolidation phase typically lasts between one and three weeks, but can occasionally extend for longer periods.
4. Converging Trendlines: The upper and lower boundaries of the triangle converge, creating a narrowing pattern. The upper trend line represents resistance and the lower trend line represents support. These trendlines should be clearly defined and approximately parallel to each other.
5. Breakout: The price eventually breaks out of the pennant in the direction of the initial trend. The breakout should be accompanied by increased volume to confirm the validity of the pattern.

There are two types of pennants: the bullish pennant and the bearish pennant.

• Bullish pennant forms after an uptrend and signals a continuation upward.
• Bearish pennant forms after a downtrend and signals a continuation downward.

How to Trade Pennants

Entry: Traders often enter positions after the price breaks out of the pennant in the direction of the initial trend. It is important to wait for a confirmed breakout with increased volume to minimize the risk of false signals.

Stop-Loss: Place a stop-loss can below the pennant for a bullish breakout or above for a bearish breakout. Set the stop-loss should at a level that is consistent with your risk tolerance and the overall market conditions.

Target: The price target can be determined by projecting the height of the preceding trend (the flagpole) onto the breakout point. This provides a potential profit target based on the historical price movement.

Conclusion

In conclusion, pennant patterns offer valuable insights into market trends and can be a useful tool for traders who understand their characteristics and significance.

Key takeaways:

• Pennants are continuation patterns that suggest a continuation of the existing trend.
• They are characterized by a symmetrical triangle shape and converging trendlines.
• Pennants often signal a renewed surge in momentum after a breakout.

By incorporating pennants into your trading strategy, you can increase your chances of identifying profitable trading opportunities and navigating the complexities of the financial markets.

See more continuation patterns in our list.