Traders pay close attention to pennants and flags when trading. Both are very similar in terms of structure, and it may take some practice before an investor can readily tell the difference between the two. These short-term patterns that last only a two to three weeks in length can be indicated by an initial significant volume move followed by a tapering off period. Then another strong volume increases at the end as the break out occurs.
Investors can use this pattern to help figure out how high the stock will advance by taking the price at the bottom of the “flag pole” in the initial pattern, then waiting until the price consolidates. Once consolidated, the stock or index will break out at a slightly higher level, and if you take the price at the bottom and add it to the break out price, this will give an excellent indication of the future price action for the pattern.
For instance, if you have a stock whose price at the base of the “flag pole” was $10 and it rose aggressive to $20, then consolidated to $18.50 where it sits for a while before breaking out at $19.00. Investors can figure the approximate top for this pattern by taking the initial $10 and adding it to the $19.00, which gives one a $29.00 target to hit for the price on this stock for this particular pattern. Typically, investors will use this pattern in conjunction with other indicators to boost their chance at an accurate forecast.
Most traders don’t use pennants on their own but combine them with other technical analysis indicators so that they don’t get faked out or get duped into making a bad trade.
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Understanding the Pennant Pattern
Pennants are short-term technical analysis usually lasting less than 21 days long. In many cases, the formation can only take 3 to 4 days. Anything taking longer than 21 days is better classified as a symmetrical triangle or falling wedge.
To identify the pennant pattern, look for a steep, fast-acting price action leading to the pattern. This attribute is vital as it helps make spotting the pendant easier. The steep price direction can be up or down but needs to move several points over a short period.
- Pattern type: Continuation
- Indication: Bearish or bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close above the upper trend line drawn across the highs for a bullish pennant in a close below the lower trendline for a bearish pendant, with above-average volume.
- Measuring: Take the distance between the previous steep move leading into the pennant, and then add that to the breakout level.
- Volume: The volume declines during the formation, expanding on the breakout.
The top-performing pennants are those with breakouts near the yearly lows. Many traders use pennants in conjunction with other chart patterns or technical indicators that serve as an additional confirmation. For example, the relative strength index (RSI) and on balance volume pair well with pennants during the consolidation phase to establish oversold levels, which can then be used to predict a run-up or breakout in the stock or index. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.