Pennant Chart Pattern

Chart patterns help investors understand price movements better and predict future price directions. One such pattern, known as the pennant pattern, is particularly recognized as a continuation pattern.

Pennant formations typically represent a brief consolidation period following a strong price movement. They allow investors to evaluate market trends and potential price breakouts.

Read our article to learn more about pennant patterns in detail.

What is a Pennant Pattern?

A pennant pattern is a technical analysis formation that shows a short consolidation period following a strong price movement. The pattern, where prices narrow within a range to form a small rectangle, typically indicates a continuation of the trend.

The pennant formation begins with a swift and steep price movement, known as the flagpole. This movement demonstrates a strong market bias in a particular direction, followed by a period where prices compress into a narrower range, forming a triangular shape. During this period, volume usually decreases.

When the formation completes, prices typically break out strongly in the direction of the flagpole. This breakout is often accompanied by high volume, indicating a continuation of the trend.

How to Identify a Pennant Pattern?

To identify a pennant chart pattern, follow these key steps:

• Try to identify the flagpole. The formation begins with a strong and sharp price movement, which can be upward or downward. This sharp movement is referred to as the flagpole.
• Following the initial strong movement, the price consolidates and forms a rectangle, indicating a period of consolidation. Look for this narrowing range.
• During the consolidation period, volume typically decreases.
• The pattern completes when the price breaks out strongly from the rectangle in the direction of the flagpole. This breakout is also supported by high volume.
• To estimate the potential price movement after the breakout, measure the length of the flagpole.

How Does a Pennant Pattern Work in Technical Analysis?

The pennant pattern is recognized in technical analysis as a continuation pattern. It usually forms after a strong price move, indicating that the existing trend is likely to continue.

First, the market gains momentum in a certain direction with a strong price movement. Following this price change, known as the flagpole, prices consolidate within a narrowing range. During this period, price movements slow down, and a consolidation phase occurs in the market.

The narrowing rectangle formation indicates that the market is approaching a decision point and that a strong movement in a certain direction is imminent. Subsequently, a high-volume breakout occurs, indicating the continuation of the trend.

Types of Pennant Chart Patterns

Pennant formations are divided into two main categories based on the direction of the price movement:

• Bullish pennant occurs during a strong uptrend. After rapidly rising prices, there is a period of consolidation. Following this, an upward breakout continues the bullish trend.
• Bearish pennant indicates a downtrend. The rapidly falling prices form the flagpole, followed by a consolidation period. In the final stage, the price breaks downward, continuing the bearish trend.

Examples of Pennant Patterns

Bullish Pennant Example

A bullish pennant appears during an uptrend and indicates the continuation of the trend. Let's examine a bullish pennant example in the chart below:

• In the chart, we first see the prices rapidly rising, forming a steep uptrend.
• Following the flagpole, prices consolidate within a narrowing range.
• At the end of the consolidation period, prices break upward, continuing the uptrend.

Let's consider the EUR/USD pair in the forex market. If the pair shows a rapid rise from the 1.1000 level to the 1.1200 level. After the rise, prices consolidate in a narrowing range between 1.1150 and 1.1200. If prices break upward after the consolidation, we can consider the bullish pennant formation confirmed.

Bearish Pennant Example

A bearish pennant starts with a sharp decline and is interpreted as a continuation of the downtrend after consolidation. You can see an example in the chart below:

• In the chart, we first see prices experiencing a sharp drop.
• Following this decline, prices consolidate within a narrow range without making major movements.
• After the consolidation period, the bearish pennant pattern is confirmed by a downward breakout.

Let's consider gold prices dropping rapidly from $1500 to $1450. Following the drop, prices consolidate within a narrowing range between $1450 and $1460, forming a small rectangle. At this point, traders might expect a downward breakout.

Advantages of Pennant Patterns

• Pennant formations can be easily identified on the chart.
• They generally give strong signals that the trend will continue.
• They help traders confirm the direction of the current trend.
• They can be effectively used in various markets such as Forex, commodities, stocks, and indices.
• Short consolidation periods allow the formation to remain effective even in fast-moving markets.
• Increased trading volume at the breakout enhances the strength and reliability of the signal.

Limitations of Pennant Patterns

• False breakouts can occur from time to time.
• Not every breakout is supported by high volume.
• Sudden market movements and unexpected events can invalidate the formation.
• There is a risk that the formation may not achieve the expected moves during periods of low volatility.
• Additional technical analysis tools and indicators are required to support the formation.

FAQ About Pennant Pattern

What indicator is best to trade with a pennant pattern?

The best indicator to use when trading a pennant pattern is the volume indicator. Volume is one of the key indicators for confirming the strength and validity of the breakout. Breakouts that occur with high volume are generally more reliable and provide stronger signals for the continuation of the trend.

Is it possible to trade a pennant pattern with Fibonacci Retracement?

Yes, it is possible to trade a pennant pattern using Fibonacci Retracement. By observing how price movements react to specific Fibonacci levels, you can better identify support and resistance levels. This type of analysis allows you to see potential entry and exit points more clearly.

Can a pennant pattern be traded with Moving Averages?

Yes, a pennant pattern can be traded with Moving Averages (MA). Moving averages help determine the direction and strength of the trend. Specifically, the price movement above or below the MA can provide clues on whether the trend will continue.

When is the best time to trade a pennant pattern?

The best time to trade a pennant pattern is when the pattern is completed, and the price makes a strong breakout from the support or resistance level.

What are the common mistakes traders make when trading a pennant pattern?

Common mistakes traders make when trading a pennant pattern include mistaking false breakouts for genuine ones, considering breakouts with low volume, and not supporting the pattern with other technical analysis tools. Another common mistake is making emotional decisions and acting too quickly before the pattern is fully formed.