What is a Pennant?
In technical analysis, a pennant is a type of continuation pattern formed when there is a large movement in security, known as the flagpole, followed by a consolidation period with converging trend lines – the pennant – followed by a breakout movement in the same direction as the initial large movement, which represents the second half of the flagpole.
Pennants are continuation patterns where a period of consolidation is followed by a breakout used in technical analysis.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.Most traders use pennants in conjunction with other forms of technical analysis that act as confirmation.
Pennants, which are similar to flags in terms of structure, have converging trend lines during their consolidation period and last from one to three weeks. The volume at each period of the pennant is also important. The initial move must be met with a large volume while the pennant should have weakening volume, followed by a large increase in volume during the breakout.
Here’s an example of what a pennant looks like:
In the image above, the flagpole represents the previous trend higher, the period of consolidation forms a pennant pattern, and traders watch for a breakout from the upper trend line of the symmetrical triangle.
Trading Pennant Patterns
Many traders look to enter new long or short positions following a breakout from the pennant chart pattern. For example, a trader may see that a bullish pennant is forming and place a limit buy order just above the pennant’s upper trendline. When the security breaks out, the trader may look for above-average volume to confirm that pattern and hold the position until it reaches its price target.
The price target for pennants is often established by applying the initial flagpole’s height to the point at which the price breaks out from the pennant. For instance, if a stock rises from $5.00 to $10.00 in a sharp rally, consolidates to around $8.50, and then breaks out from the pennant at $9.00, a trader might look for a $14.00 price target on the position – or $5.00 plus $9.00. The stop-loss level is often set at the lowest point of the pennant pattern since a breakdown from these levels would invalidate the pattern and could mark the beginning of a longer-term reversal.
Most traders use pennants in conjunction with other chart patterns or technical indicators that serve as confirmation. For example, traders may watch for relative strength index (RSI) levels to moderate during the consolidation phase and reach oversold levels, which opens the door for a potential move higher. Or, the consolidation may occur near trendline resistance levels, where a breakout could create a new support level.
Real World Example
Let’s take a look at a real-life example of a pennant:
In the above example, the stock creates a pennant when it breaks out, experiences a period of consolidation, and then breaks out higher. The upper trend line resistance trend line of the pennant also corresponds to reaction highs. Traders could have watched for a breakout from these levels as a buying opportunity and profited from the subsequent breakout.