Bearish and Bullish Pennants
Similar to rectangles, pennants are continuation chart patterns formed after solid moves. After a significant upward or downward move, buyers or sellers usually pause to catch their breath before taking the pair further in the same direction. Because of this, the price usually consolidates and forms a tiny symmetrical triangle called a pennant. While the price is still consolidating, more buyers or sellers usually decide to jump in on the solid move, forcing the price to bust out of the pennant formation.
A bearish pennant is formed during a steep, almost vertical, downtrend. After that sharp price drop, some sellers close their positions while others decide to join the trend, consolidating the price for a bit. As soon as enough sellers jump in, the price breaks below the bottom of the pennant and continues to move down. As you can see, the drop resumed after the price broke into the bottom. To trade this chart pattern, we’d put a short order at the bottom of the pennant with a stop loss above the pennant.
As its name suggests, bullish pennants signal that bulls are about to go a-chargin’ again. This means that the sharp climb in price would resume after that brief period of consolidation when bulls gather enough energy to take the price higher again. In this example, the price made a sharp vertical climb before taking a breather. I can hear the bulls stomping and revving up for another run! As we predicted, the price moved upward after the breakout. To play this, we’d place our long order above the pennant and our stop below the bottom of the pennant to avoid fakeouts. As we discussed earlier, the size of the breakout move is around the height of the mast (or the size of the earlier move). You see, pennants may be small, but they could signal substantial price moves, so don’t underestimate them!