What is a Pennant Pattern?
A Pennant is a continuation pattern formed when there is a large movement followed by a period of consolidation with converging trend lines, forming the pennant, followed by a breakout in the initial direction of the large movement.
Pennant patterns are identified by the flag-shaped candles following large moves up or down. The initial move up is the flagpole of the pattern, but when the large price movement eases up it enters a period of consolidation.
Pennant patterns can be bullish or bearish depending on the direction of the trend, but the crucial element is the flagpole. Plenty of candlestick charts will show candles will paint candles that look to be in the form of a pennant or flag, however be sure to locate the flagpole too. The sudden spike up or down at the initial stage of the formation must be present for the pennant pattern to be confirmed.
What is a Bullish Pennant Pattern?
A bullish pennant is a candlestick pattern that indicates the continuation of a strong upward move. They are formed when a market makes an explosive move upwards, then consolidates between converging support and resistance lines. Technical analysts take this as a sign that the original ascending price move is going to continue.
To identify a bullish pennant, you need to be on the lookout for two elements.
- An upward movement known as the ‘flagpole’
- A price consolidation that forms a symmetrical triangle with its converging support and resistance lines
What is a Bearish Pennant Pattern?
A bearish pennant is a candlestick pattern that indicates the continuation of a downwards price movement, essentially the polar opposite of bullish pennants. When technical analysts spot a bearish flag pennant, they take it as a sign that the downward price movement is going to continue once the market breaks below its support line. To identify a bearish pennant, be on a look out for consolidation between support and resistance after a major bearish price movement. The support and resistance lines will form a symmetrical triangle, showing that the market is in conflict between positive and negative sentiment.
Trading a Pennant Pattern
Looking at the daily time frame of BTC (Bitcoin) we can see a bullish pennant that’s been painted after the original breakout above $10,000. This level is the 5-figure psychological resistance, so following the aggressive spike upwards in price, there was a period of consolidation for about 3 months. During this trading period, the price of Bitcoin was consolidated between two trend lines, both an uptrend & downtrend before breaking out upwards to the topside. Following this breakout, there was another wave upwards that sent the price towards it’s previous ATH price created back in late 2017.
Looking at the daily time frame of LINK (Chainlink) we can see a bullish pennant that’s been formed after it reached its ATH during the summer. As Bitcoin was breaking out, seen in the previous example, LINK created a new high and then spent a period a little greater than 5 months in consolidation before breaking out again. The original bullish momentum was formed around $6 before finding a new high at just under $20. From here, LINK was squeezed in between two trend lines, both an uptrend and downtrend before breaking upwards to hit another new high.
Differences Between the Symmetrical Triangle and the Pennant
While both the Symmetrical Triangle and the Pennant pattern are continuation patterns with a good degree of reliability, there are two key differences between the two in terms of their formations. They both consistently reach higher lows and lower highs, creating two converging trend lines that form this triangle shape. However, the Pennant includes a flagpole at the start of the pattern, which isn’t there in the formation of the Symmetrical Triangle. The flagpole is created when the price suddenly pulls back or spikes up aggressively in the direction of the current trend. This move is followed up with a large spike in volume until the price eventually pauses, forming the body of the Pennant, before breaking out in the direction of the trend after a period of consolidation.
Limitations of the Pennant Pattern
Tread with caution when trading the pennant, as traders may confirm their bias in their heads and get faked out on bullish and bearish signals that the pennant paints. It is recommended to draw out the pattern and wait for a breakout before placing your trade in a certain direction, either bullish or bearish.
