Pennants
A pennant is a continuation pattern in technical analysis formed when there is a large movement in a stock, followed by a consolidation phase. The pattern is identified by two converging trendlines that form a triangle shape. The pennant is considered a bullish continuation pattern, meaning that it is likely to break out in the direction of the previous trend.
How Pennants Form
Pennants form after a significant price movement in a stock or security, often following a sharp increase or decrease in price. The consolidation phase that follows is characterized by lower trading volume and tighter trading ranges as traders and investors take a break and wait for the next move. The converging trendlines represent a period of indecision in the market as buyers and sellers battle it out.
Trading Pennants
Traders typically look to enter a trade when the price breaks out of the pennant pattern, signaling a continuation of the previous trend. The breakout is typically accompanied by high trading volume, confirming the strength of the move. Traders may set stop-loss orders to limit their downside risk in case the breakout fails to materialize.
It’s important to note that not all pennants will result in a successful breakout. Traders should use additional technical analysis tools and indicators to confirm the validity of the pattern and the likelihood of a successful trade.
