Bear Pennant Pattern

A bear pennant pattern is a trading pattern indicating a downward price move’s impending continuation. It provides traders with the opportunity to enter a short position and make financial gains. Individuals can also use this chart pattern as a breakout signal to confirm the existing downtrend.

The formation of this continuation pattern occurs following a sharp price drop. It looks like a triangular flag as the asset’s price moves sideways, gradually making higher lows and lower highs. Then, the downtrend continues with another price fall of a similar size. This pattern has three main components – the pennant, flagpole, and a breakout.

• A bear pennant pattern is a chart pattern that signals that the price of a financial instrument may continue to drop. Traders can use such a continuation pattern to sell short and make profits in the market.
• Three bull pennant pattern elements are the pennant, the flagpole, and the breakout to the downside. 
• Before the breakout in such a pattern, a consolidation phase occurs, which stems out of a downward trend.
• A key difference between a bull pennant and a bear pennant is that the former signals the continuation of a bull market while the latter signals the continuation of a bear market.

A bear pennant pattern is a continuation pattern that may appear in a financial security’s price chart during a downtrend, indicating that the trend will likely continue. Traders can utilize this pattern to join an existing downtrend and short-sell a financial instrument to make profits.

This bear pattern has two phases — a strong downtrend and a consolidation period following the downtrend. The first phase begins when sellers push the financial instrument’s price lower, creating a sequence of lower lows and lower highs.

The second phase begins when sellers in the market take a step backward following the short-term low’s creation. The triangular consolidation in the asset’s price chart characterizes the temporary pause. One must note that the consolidation phase needs to stem from a downward trend. This consolidation phase is over after sellers in the market secure a breakout.

Only the buyers do not use the pause to drive a rebound after creating a new low; the sellers in the price action’s control utilize the pause to consolidate the gains and make preparations for pushing the price lower.

The components or elements of bear pennant patterns are as follows:

• The Flagpole: Its formation occurs because the financial instrument’s price trades in a series of lower lows and lower highs. In other words, this element appears owing to a steep decline in price.
• The Pennant: It is formed by the two converging lines between which the consolidation phase occurs. If this pattern slopes upwards, it resembles an ascending wedge.
• Breakout: While the lower trendline’s break activates this pattern, the upper trendline’s break invalidates the formation.

Source

In the chart of Zydus Lifesciences, taken from TradingView, the entire concept is clearly depicted. A bearish pennant is formed because it slopes downwards, and the green support line meets the red resistance line to form the pennant triangle.  It is better to wait for the breakout to happen before taking any action. So, if the trader enters the market just below the support where the breakout happens downwards, and takes a short position, then they do not miss out on the trade, because there is no guarantee that the price will trace back to the breakout level again. There is also another possibility of the breakout above the resistance level, upwards, but the trader has to wait, which again may or may not happen, and is, therefore, a risky decision. 

Let us look at a few bear pennant pattern examples to understand the concept better.

Example #1

Suppose John, a trader, wants to make short-term financial gains in the market. The price of ABC stock, which was on his watchlist, decreased significantly before entering a consolidation phase between a roughly symmetrical triangle. Then, after a breakout to the downside occurred, he identified a bear pennant pattern formation. He entered a short position to make the most of this opportunity. It turned out that his decision was right as ABC stock’s price dropped significantly, generating profits for John.

Example #2

On May 23, 2022, Avalanche (AVAX) surged 0.5%, reaching above $31. However, its price stayed trapped within a trading range that looked like the structure of a bear pennant pattern. AVAX neared a technical breakdown as the price moved toward the apex of the pennant, which was the point at which the lower and upper trendlines converged. This painted a bearish target for AVAX/USD at $11.50 by June, which was a drop of 65% from the price on May 23.

The above image shows the daily price chart of AVAX/USD, featuring the bear pennant breakdown setup.

One must seek a consolidation between resistance and support after a significant bearish price move to identify this chart pattern. The resistance and support lines form a triangle that is roughly symmetrical, which shows that the market participants have both negative and positive sentiments. Like in the case of bullish pennants, decreasing volume is a good indicator of the bearish pennant’s formation. Then, the volume rapidly builds up after the breakout occurs.

One must note that spotting bear pennants can be a bit tricky in the beginning since the consolidation might be smaller than the preceding movement in price.

One can trade bear pennant patterns by following the steps below:

1. Place an entry order for short selling immediately after a candlestick closes below the lower trendline of the pennant pattern.
2. Place a stop loss on the pennant’s other side, just over the upper trendline.
3. Measure the initial price drop before the consolidation started. Then, place the profit target at an identical distance under the breakout point of the pennant. For instance, if the initial price drop was 20 price interest points of pips, one must place the profit target of 20 pips under the trade entry.

The above process can be explained using the hourly chart of Tesla given below. Here, the support line will give the breakout which should be the entry point. The stop loss will be the resistence level, where the highest point at which a small breakout is seen. 

Source

The steps to trade this pattern using another method are as follows:

1. Wait until the asset’s price drops under the lower trendline of the pennant.
2. After the support breaks, place an order to sell the asset once its price retests the trendline – the broken support becomes the resistance level.
3. Place a stop loss over the resistance area.
4. Lastly, place a profit target at an equivalent distance under the pennant’s breakout.

Understanding how to trade bear and bull pennant patterns can be confusing if one does not understand their distinct characteristics. Moreover, if traders do not know their critical differences, they may end up making incorrect decisions, which may, in turn, lead to significant losses. So, let us find out how the two trading patterns differ.

This article has been a guide to what is a Bear Pennant Pattern. We compare it with bull pennant pattern, explain its components, examples, & how to spot & trade it. You may also find some useful articles here -

• Bull Flag Pattern
• Bear Flag Pattern
• Triangle Chart Pattern