Pennant Pattern

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21 Aug, 2024

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A pennant pattern is a kind of continuation pattern that appears when there’s a significant upward or downward movement in a financial instrument’s price and a subsequent period of consolidation before finally moving in the direction of the initial movement. Traders use it to predict upcoming price movements.

This chart pattern has converging trend lines throughout the period of consolidation and last for 1-3 weeks like flags. This pattern enables swing traders to analyze any financial instrument that takes a break from its current progression. One may view a break in this pattern as an indicator for entry. Pennant patterns are of two types — bullish and bearish.

What Is Pennant Pattern?

Pennant pattern refers to a chart pattern that traders can witness when a stock or any other security experiences a significant move to the downside or upside after a consolidation period before it subsequently moves in the same direction. Bearish and bullish are two kinds of pennant chart patterns.
Individuals can use this pattern to predict a stock’s price movement. Its three main features are breakout levels, a flagpole, and the pennant.
Contrary to symmetrical triangles, such patterns have a flagpole.
This pattern can be there in a price chart for 1 to 3 weeks.

Pennant Pattern Explained

The pennant pattern refers to a chart pattern that forms when a financial instrument, for example, a stock, experiences a noteworthy movement towards the downside or upside before a short consolidation period prior to moving in the same direction afterward. Traders utilize this pattern as an indication to adjust their trading positions according to the changing market dynamics.

Some crucial characteristics of pennant patterns in the stock market are as follows:

A Flagpole: These patterns always start with a flagpole that differentiates them from other kinds of patterns (for example, the symmetrical triangle. This flagpole is the initial significant move leading up to the symmetrical triangle.
Breakout Levels: In the case of such a pattern, there are two breakouts; one at the flagpole’s end and another following the consolidation period.
The Pennant: This refers to a triangular pattern appearing between the breakout and the flagpole during the period of consolidation. The formation of the triangle occurs after the trend lines converge.

One can clearly understand the features of this pattern by looking at the following Indian Renewable Energy Development Agency or IREDA price chart.

Source

As one can observe in the chart, the white line passing through the four green candles is the flagpole. It represents the upward trend in price preceding the pennant, which is formed by the two converging trend lines. Traders look for a breakout above or below the upper or lower trend line following the period of consolidation to generate gains from the bullish or bearish continuation. Note that the breakout above the trend line is a confirmation of the bullish continuation. On the other hand, a breakout below the trend line confirms a bearish continuation.

The above chart does not show a breakout. So, let us look at another chart with a breakout above the upper trend line, demonstrating a bullish continuation.

Source

In the above chart of HFCL Ltd, one can observe that a breakout materialized following a consolidation period, thus providing a confirmation of the bullish continuation. Individuals can find charts like these on TradingView to improve their understanding of the concept.

Types

The two types of pennant chart patterns are as follows:

Bullish Pennant: A bullish pennant pattern is a continuation pattern occurring in strong uptrends. Following a long uptrend, traders aim to close their position, assuming a reversal is on the horizon. As traders start exiting the financial instrument, the prices start to consolidate. Simultaneously, new buyers begin purchasing the stock, leading to the prices breaking out in the prior trend’s direction.
Bearish Pennant Pattern: The formation of a bearish pennant occurs after a significant decrease in a financial instrument’s price. Following a long downtrend, traders aim to close their short position, assuming that a trend reversal will materialize. The security prices start to consolidate as traders begin exiting the stock. Simultaneously, new sellers begin selling the financial instrument in the prior downtrend’s direction.

How To Trade?

Let us look at how to trade bullish and bearish pennant chart patterns.

#1 - Trading A Bullish Pennant

Typically, traders place a buy limit order at the top trendline. After a breakout of that trendline, traders first seek a higher-than-average volume. This helps them confirm the pennant chart pattern breakout.

Then, traders place the price target sell order at the height of the initial flagpole in addition to the breakout price. Finally, they would typically place just a stop-loss order under the lower trendline to manage risk.

#2 - Trading A Bearish Pennant

Traders generally place a sell limit order at the support or lower trendline. Upon the lower trendline’s breakout, traders first seek the higher-than-average volume to confirm the breakout of the pennant chart pattern.

Then, the cover price is set at the difference between the height of the initial flagpole and the breakout price. Generally, traders place a stop loss above the resistance or upper trendline.

Examples

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

Example #1

In April 2023, a popular financial analyst Jesse Colombo posted his observation on Twitter regarding the ongoing Bitcoin trend, indicating that the formation of a pennant chart pattern is occurring just below the critical resistance level of $30,000. According to Colombo, if the cryptocurrency breaks out of the pennant chart pattern and crosses the $30,000 mark with massive trading volume, it would act as a bullish confirmation indicator for Bitcoin.

Example #2

Suppose Jim Smith was an experienced securities trader tracking ABC stock. The security’s price chart showed a strong uptrend before consolidation began. He entered a long position after noticing a pennant chart pattern and a breakout after the end of the consolidation period, hoping that the price would increase. His decision was correct as the stock price jumped, generating returns for Jim.

Example #3

In early April 2023, Gold triggered a bull pennant chart pattern’s decisive upside breakout. Traders got a confirmation of the strength as the precious metal exceeded $2,010 and $2,003 highs. Moreover, the chart shows a completion of the Fibonacci retracement at $2,018, and the rally triggered a monthly breakout, thus confirming the strength.

Difference Between Flag And Pennant Pattern

Individuals new to trading may find the concepts of pennants and flags confusing. Not fully understanding them can cause one to make incorrect buy-and-sell decisions, leading to significant losses. Hence, knowing their critical differences is crucial. Let us look at them.

Flag	Pennant Pattern
Traders can spot a rectangular formation in this case.	In the case of this pattern, traders can spot a symmetrical triangle formation, sloping in the direction opposite to the original move.
Individuals use this chart pattern to spot the potential continuation of a previous trend from a price at which a financial instrument’s price drifted against that trend.	It signals the impending forthcoming continuation of an upward or downward trend.

Pennant Pattern vs Symmetrical Triangle

There are some noteworthy differences between pennant chart patterns and symmetrical triangles. One must be aware of them to make trading decisions that generate returns and help them achieve their financial goals. So, let us look at their distinct features.

Pennant Pattern	Symmetrical Triangle
Pennant chart patterns have a flagpole.	Symmetrical triangles do not have a flagpole.
In this case, a breakout follows a period of consolidation.	Two converging trendlines linking various peaks and troughs in sequence characterize a symmetrical triangle.
A pennant is a short-term pattern that usually takes 1-3 weeks to complete.	Usually, the formation of triangle patterns takes much longer.

Frequently Asked Questions (FAQs)

1. Is a pennant pattern bullish or bearish?

A pennant pattern in the stock market can be bullish or bearish. It depends on a stock or any other financial security’s price movement. If there is a strong uptrend before a period of consolidation and a subsequent movement in the same direction, a bullish pennant chart pattern will form. On the other hand, if the trend is a downtrend instead of an uptrend, the formation of a bearish pennant chart pattern occurs.

2. What is the success rate of the bullish pennant pattern?

Generally, pennant chart patterns have a low success rate. According to LinkedIn, the success rates of bullish and bearish pennant chart patterns are 54.87% and 55.19%, respectively. Hence, such patterns might not be that reliable for traders when making buy-and-sell decisions.

3. How do you calculate a bullish pennant?

Individuals must measure the pole of the pennant, i.e., the initial rise in the financial instrument’s price, before the consolidation phase begins and then set the profit target the identical distance above the breakout point of the pennant.