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Pennants | |
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Unlike reversal patterns, continuation patterns often form in a short period of time and in a small trading range. Pennants are a type of continuation pattern and if correctly identified, can provide a trader a valuable insight into the movement of a security. Pennants can be found in strong established trends and when completed will often lead towards the trend continuing in the same direction. Pennants are so named as their appearance resembles a small pennant or flag flying on a pole. One of the characteristics of pennants is that they normally only cover a small price range. A pennant in an uptrend will form when the prevailing trend temporarily gives way to supply causing the movement upwards to halt. The demand for the security will form the lows in the pennant as seen in the chart below.  At the same time, the minimal amount of resistance is eroded away and this results in continued higher prices and a continuation of the trend. It is the break out that completes the pennant. Volume can also be used as a confirmation tool for a pennant. Volume will normally increase as the pennant is forming but then decrease as the security trades within the pennant. Volume will then normally increase again as the security breaks out from the pennant. A suggested trading strategy might be to initiate a buy when the security trades out from the pennant, i.e. when it establishes a high above the previous highs that form the top part of the pennant. An initial stop would ideally be placed on the other side of the pennant. The opposite is true for going short. You could initiate a short trade when the security trades down below from the pennant, i.e. when it establishes a low below the previous lows that form the bottom part of the pennant. Similarly, an initial stop would ideally be placed on the other side of the pennant.
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