Technical Classroom: How to use Pennant Pattern in trading

Pennant patterns are an integral part of technical analysis. Successful traders combine this pattern with other technical indicators and other forms of technical analysis to maximize their odds of success. A Pennant can be used as an entry pattern for the continuation of an established trend.

Formation of the Pennant Pattern

-Pennants look very much like symmetrical triangles. But pennants are typically smaller in size (volatility) and duration.
-The pattern has a triangle appearance because the two trend lines converging towards each other connected to the pole.
-The move which precedes the triangle portion of the pattern (the pole) must be a sharp move, nearly vertical.
-It is important to look at the volume in a pennant—the period of consolidation should have lower volume and the breakouts should occur on higher volume.
-These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move.
-Most traders use pennants in conjunction with other forms of technical analysis that act as confirmation.
-There are pressure areas in a stock chart, which may be minor support or resistance, or it may even be a minor target point. In this zone some traders book profit; however, the trend remains unchanged. This may result in a small swing or the price may remain in two converging trend lines. Both the dynamic support and resistance lines are converging towards each other in an uptrend or in a downtrend, forming Pennant.
-The formation usually occurs after a strong trending move that can contain gaps.
-Bullish Pennant can form after an uptrend; bearish Pennant can form after a downtrend.

Trading on Bullish Pennant

-Pennant Buy Signal – After the prices have moved higher and have consolidated, creating a symmetrical triangle, a potential buy signal is given when prices penetrate and close above the upward resistance of the downward sloping line.
-Pennant Target: The length of the pole can be applied to the slanting resistance line of the Pennant to estimate the advance or target area.

-The sideways period is often followed by another sharp rise. This is where the trading opportunity comes in. Once the pole and a triangle or have formed, traders watch for the price to breakout above the upper slanting trend line. When this occurs, enter a long trade.

Trading with Bearish Pennant

-Pennant Sell Signal - Assuming prices previously moved downward, then after a period of price consolidation, a potential sell signal is given when price penetrates and closes below the upward sloping support trend line. If a short trade is taken on the downside breakout, place a stop loss above the upper trend line of the triangle.
-Pennant Target: The length of the pole can be applied below the support line of the pennant to estimate the decline or target area.

Conclusion

-Pennants are short-term continuation patterns that mark a small consolidation before resuming the previous move in the same direction. The pole is formed by a line which represents the primary trend in the market.
-It is important that pennant is preceded by a sharp advance or decline in share prices.
-Pennant patterns are a commonly used-technical analysis tool and majorly a choice of breakout traders and swing traders.
-It's important to look at the volume in a pennant—the period of consolidation should have lower volume and the breakouts should occur on higher volume.

The author is Head - Technical & Derivative Research at Narnolia Financial Advisors.

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