Key Characteristics of a Pennant:

1. Flagpole:
   • The pennant pattern begins with a strong and steep price movement, either upward or downward, which forms the “flagpole.” This movement is typically driven by high trading volume and represents the initial momentum in the market.
2. Consolidation Phase:
   • After the sharp move, the price enters a consolidation phase, where it trades within a small, narrowing range. This range forms the pennant, which resembles a small symmetrical triangle. The consolidation represents a brief pause in the market before the next move.
   • During this phase, the trading volume typically decreases as the market digests the initial move.
3. Breakout:
   • The pattern is completed when the price breaks out of the pennant’s range in the same direction as the initial move (the flagpole). This breakout is usually accompanied by a resurgence in trading volume, confirming the continuation of the trend.
4. Duration:
   • Pennants are relatively short-term patterns and usually last from one to three weeks. They are considered more reliable when they occur over a shorter time frame.
5. Continuation Signal:
   • Pennants are considered continuation patterns, meaning they signal that the trend preceding the pennant is likely to continue after the breakout. For example, if the flagpole was formed by an upward move, the breakout from the pennant is likely to be upward as well.

Types of Pennants:

1. Bullish Pennant:
   • This occurs during an uptrend. The flagpole is formed by a sharp upward price movement, followed by a pennant (a small, symmetrical triangle pointing to the right). The breakout from the pennant is expected to be in the same upward direction, signaling the continuation of the bullish trend.
2. Bearish Pennant:
   • This occurs during a downtrend. The flagpole is formed by a sharp downward price movement, followed by a pennant. The breakout from the pennant is expected to be downward, signaling the continuation of the bearish trend.

Example:

Suppose a stock’s price rises sharply from $50 to $70, forming the flagpole. After this surge, the price starts consolidating, trading between $68 and $72 in a narrowing range, forming the pennant. After a period of consolidation, the price breaks out above $72, resuming its upward trend. This breakout is confirmed by increased trading volume, suggesting that the stock is likely to continue its upward trajectory.

Importance in Trading:

• Trend Continuation: Pennants help traders identify opportunities to enter the market in the direction of the prevailing trend after a brief period of consolidation.
• Risk Management: Traders can use pennants to set entry points, stop-loss levels, and profit targets based on the pattern’s structure, helping to manage risk effectively.
• Volume Confirmation: The volume pattern during the formation of the pennant and at the breakout is critical in confirming the validity of the pattern and the strength of the trend continuation.

A pennant is a technical analysis chart pattern that signals the continuation of a prevailing trend after a brief consolidation phase. It is identified by a strong price movement followed by a small, symmetrical triangle pattern and a subsequent breakout in the same direction as the initial move. Pennants are valuable tools for traders looking to capitalize on the continuation of market trends.