Bearish Pennant Pattern - a Trader's Guide
By Stelian Olar, Updated on: Jan 09 2024.
Have you ever noticed a pennant shape on a stock chart and wondered - is that a bullish or bearish pattern?
If it's pointing down, it's likely a bearish pennant, signaling that prices may continue dropping.
As a trader still honing my skills, I used to get frustrated when I'd spot a chart pattern but didn't know how to interpret or trade it.
The pennant pattern stumped me - tiny triangles bobbing up and down amongst the peaks and valleys of stock charts. Last month, I finally decided to master the mysterious bearish pennant pattern.
In this article, we'll explore:
- What a bear pennant pattern is,
- How to identify potential reversals with the bear pennant,
- How to trade a bearish pennant,
- Answer is a pennant bullish or bearish,
- And most importantly - how to potentially profit from it.
I'll share the trading strategy I now use with bearish pennants, including things I wish I knew earlier like ideal entry and exit points.
My goal is to decode the bearish pennant pattern so you can spot it more easily and have a battle plan ready to act. Instead of watching pennants pass by full of money-making potential, you'll be prepared to try capturing some of those gains.
So let's discover how to turn bear pennant patterns into potential trading opportunities!
What is a Bearish Pennant Pattern
A bear pennant is one of many bearish chart patterns technicians look for when doing technical analysis. It's considered a continuation pattern, meaning the current selling pressure is expected to resume.
Visually, a bearish pennant looks like a small symmetrical triangle or tiny pennant shape flying downward.
It forms after a stock has made a sharp move lower, called the "flag pole." Then during the pennant, the price moves into a tight consolidation bounded by two trend lines that narrow together and are converging.
This coiling reflects a battle between buyers and sellers as the stock price stabilizes temporarily.
But technically speaking, how is this different from other triangles like a descending triangle or flag?
While their formations look alike, continuation patterns like pennants are unique because they emerge within an existing uptrend or downtrend rather than reversing it. Traders watch them closely to identify when a stock price may break out of the pennant and resume its dominant direction.
Now that we know how to recognize a bear pennant, next let’s explore how this pattern forms...
Bearish Pennant Pattern Components and Formation
Now that we know what a bearish pennant looks like, let’s break down how this is this pattern formed on a stock chart. A bearish pennant has two main parts:
- The flag pole,
- And the pennant itself.
Flag Pole
- The flag pole comes first - this is the sharp, vertical drop in price action leading up to the pennant.
- It reflects strong selling pressure driving prices lower fast.
The Pennant
Next, the pennant takes shape as the price movement starts to consolidate. The upper and lower boundaries create new support and resistance levels showing where buyers and sellers reach equilibrium temporarily.
Inside the pennant formation bearish, the price will oscillate between these boundaries which slope closer together. Typically, the pennant lasts anywhere from 1-3 weeks. There may even be a slight upward drift, but overall the range narrows indicating decreasing volatility.
As the pennant reaches its apex, traders wait eagerly to see whether price action will resume the downtrend. A decisive break below pennant support levels signal the seller dominance continues and may set off another wave lower.
What Is the Success Rate of Bearish Pennant
According to historical data, and based on over 1,600 trades only 32% of the times the bearish pennant pattern target was reached successfully, with the next potential decline typically being equal to the flag pole height that preceded the pennant.
So if we apply this statistical performance to a stock chart example, if the flag pole shows a $2 share price drop before the pennant begins forming, we could estimate the next downside target below the pennant support break to be around another $2 fall in share price.
Keeping these bullish-to-bearish odds in mind builds conviction for trading a completed bearish pennant flag.
Bear Flag, Bear Pennant, Bear Triangle Patterns - Know the Difference
If you're a novice chart reader, it’s tricky to tell all the downward pointing shapes apart.
Is that pattern a bear flag chart pattern or bear pennant flag?
Or is it a bearish flag pennant or even a bear triangle pattern?
Recognizing the differences is essential to properly interpreting the price action signals. Let’s overview 3 common bearish extensions:
Bear Flag vs Bear Pennant
These two bear chart patterns have the closest resemblance because both start with a flagpole decline followed by a channel (flag) where prices momentarily consolidate before potentially continuing down.
One key difference is the shape of the consolidation phase:
- The bear chart flag consolidates within a rectangle shape.
- The bearish pennant consolidates within the converging triangle.
Bear Pennant vs Bearish Triangles
A bear triangle pattern also shows the price compressing within converging trendlines after a selloff. Though triangles emerge during ranging markets rather than suddenly like flagpoles. Their boundaries tend to slope more gradually unlike the bear pennant.
Bear Pennant vs Bull Pennant
One key difference between these two similar patterns lies in their implied future direction. The bear pennant vs bull pennant formations provide clues as to whether downward or upward momentum will likely resume.
One key difference - bullish pennants extend existing uptrend but bearish flag pennant shapes extend existing downtrends.
Getting the chart pattern names straight takes practice! But accurately identifying a bear flag chart pattern versus bearish flag pennant could give your trading an edge if you know how to respond to each formation.
What Happens After a Bear Pennant
To forecast likely future direction, technical analysts closely watch the all-important bearish pennant breakout - the point where prices break below pennant support.
According to charting statistics, breakout occurs roughly 75% of pennant formations. The break below pennant support signals sellers have overwhelmed willing buyers during the consolidation. This completes the pattern and implies the prior downtrend will probably resume with gusto.
However, there still is a 25% chance the breakout could be to the upside. If strong buying interest drives the price over resistance, the pennant formation is invalidated and it becomes a bearish pennant reversal. The failed pattern suggests a trend change may be underway.
Now let’s move on to trading tactics once we spot this bearish pattern...
How to Trade a Bearish Pennant Pattern
So now let’s discuss a trading tactic to try profiting when prices break below the bearish pennant support:
The strategy is:
- Identify prior downtrend and vertical drop forming the flag pole
- Look for pennant consolidation taking shape
- Wait patiently for breakout below pennant support
- Enter short position once support break triggers
- Set stop loss order just above pennant resistance
- Target taking partial profits on moves downward equal to the flag pole’s size
Why Is Trading Bearish Pennants Risky
The biggest risk comes from a key question - are pennants bullish or bearish?
It's tricky to distinguish in real-time before the breakout trigger confirms the direction and other chart shapes can resemble pennants temporarily before changing.
If you misdiagnose a bullish reversal pennant, or if the breakout is part of that 25% failure rate against the tendency, it means having to quickly cut losses when the price heads upward through your bearish pennant trade’s stop loss.
Impatience leading to pre-mature entries rather than waiting for the ideal trigger is another common pitfall. Partial rather than full profits are more likely with pennants as these trades require accepting smaller bite-sized gains.
As with any trading strategy, be ready for some stopped out losers before hopefully gaining enough successful shorts over time to produce overall profits.
Check out Pepperstone's demo trading accounts here to sharpen your bear pennant skills with fake money before putting real dollars on the line! (check eToro if you’re a US resident)
And remember, study both your winning and losing trades so you can replicate what works and improve on mistakes.