Imagen that you are standing at ground level and looking at a triangle on a pole that rises to the sky. The top of the triangle is sloping down. This visual is what you see on a stock chart when price rises (and breaks out of a resistance level). This resistance level then becomes a support level (ground level) and moves higher in an up trending manner. This price action forms the pole.
Price reaches a level where profit-taking begins and starts to move lower. Price moves lower in a lower high/higher low manner within a triangle pattern. Price moves within a large range to a small range virtually compressing into the point of the triangle. This triangle is a pennant formation. Traders refer to the price action within the triangle as a consolidation.
Typically, in an uptrend the top of a bullish pennant is downsloping.This makes sense since, in an uptrend, profit taking will result in lower prices as traders sell stock.
A Bullish Pennant looks like this
The flagpole is measured from the price breakout point to the highest price point before the price starts to pull back. The blue dotted line represents resistance or the top of a price consolidation area. The flag pole starts when price moves above the resistance area which is represented by the blue dotted line. Notice how the top of the bullish pennant slopes downward.
The best way to illustrate a bullish pennant formation is by displaying it on a stock chart. Below is an example of a bullish pennant on a daily chart.
On the chart above, price breaks out after a 13 day consolidation period. This breakout point starts the beginning of the flagpole. Price advances sharply for 4 days and starts to pull back. Price forms lower highs and slightly higher highs for 9 days. Price continues to move in an increasingly narrow range forming the pennant. Notice how the upper and lower lines of the pennant converge. Converging trend lines are an identifying feature of the pennant.
Key points for the Bullish Pennant –
The bullish pennant is most significant when it appears after a sharp advance in price.
A pennant can form over one or more weeks. However, the pennant usually forms over a shorter time frame than the flag formation.
Price highs move slightly lower and price lows move slightly higher. Drawing a trend line connecting price highs and then another connecting price lows form two converging lines which are an identifying feature of the pennant.
A drop in closing price that breaks the lowest low of the pennant signals a violation of the pennant formation and possibly a change in trend.
Traders wait for a breakout from the pennant to confirm that the preceding trend is still in play. It is best not to anticipate a breakout one way or the other. Some consider the pennant area to be a “no trade zone”.
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