Pennant Patterns in Technical Analysis
By Stelian Olar, Updated on: Jan 09 2024.
The pennant pattern is one of my favorite chart formations to trade.
I still remember the first bull pennant pattern I ever traded on the 5-minute TSLA chart earlier in my trading career. After spotting the pennant pattern stock take shape, I watched the price coil tighter into a perfect little pennant right at an all-time high resistance.
My heart raced faster as I anticipated the impending breakout.
Sure enough, Tesla's price thrust higher out of that pennant pattern, allowing me to ride the momentum for a nice profit.
I was hooked!
In this article, we’re going to break down everything you need to know about:
- Trading pennant patterns
- Comparison between flags and pennants.
- You’ll learn how to identify both bullish pennant and bearish pennant formations.
- We’ll also discuss chart pattern entries, stop losses, and profit targets so you can start trading pennants effectively within your own trading strategy.
Mastering high-probability chart patterns pennants and flags could significantly upgrade your price action trading. Let’s dive in and transform the way you analyze stock pennant patterns and price action through the lens of pennant formation!
What Is Pennant Pattern in Trading
A pennant is a specific chart pattern that indicates a market consolidation followed by a significant price movement. It’s what traders call a continuation pattern, meaning it suggests the current trend is going to resume after the period of sideways price consolidation.
The name “pennant” reflects the pattern’s resemblance to an actual triangular flag or pennant shape.
Visually on the chart, you’ll see converging trend lines forming a small symmetrical triangle. There’s first an initial large price movement, followed by contracting price action as the pennant is forming. This consolidation forms the pennant pole and flag shape (chartists sometimes call pennant patterns “flags” as well - pennant flag pattern).
Pennants belong to a broader group of well-known chart trading pattern tools used in technical analysis. They act as visual cues that may signal upcoming price consolidation phases and future trend continuations. Along with the triangle pattern, bullish flag and bearish flag, head and shoulders, and double tops/bottoms, pennants are one of the most popular trading patterns traders look for.
Specifically, pennants take shape as symmetrical triangles bound between two converging trend lines - one upper trendline and one lower trendline.
You’ll typically spot pennants forming right after a strong advance or sharp decline:
- There will first be a clear price consolidation, often after a gap, representing the flagpole.
- Then prices consolidate in a contracting symmetrical triangle bound between upper trend line support and resistance.
Overall, the pattern pennant signals a potential continuation of the previous trend after prices breakout.
Pennants help traders visually anticipate both the consolidation phase as well as forecast the next potential price swing.
How Pennants Work - Pennant Formation
Pennants start forming after a strong advance or steep decline which represents the flagpole. Then a period of pennant consolidation occurs as prices oscillate between support and resistance, forming the pennant shape.
Bullish pennant pattern:
In an uptrend, the pattern signals a temporary pause after strong buying pressure. Prices consolidate under resistance as buyers take a breather, then the pennant breakout above resistance indicates renewed upside conviction.
Bearish pennant pattern:
In a downtrend, the pattern flags a potential pullback after substantial selling followed by a short period of consolidation above support until enough distribution builds up for the next leg lower. The breakdown below support reactivates downside momentum.
In both cases, pennant chart pattern show consolidations signaling potential trend resumptions once price breaks out forcefully up or down. The direction of the previous trend clarifies whether the pennant leans bullish or bearish.
Think of the contracting price action as a coiling spring - compression leads to expansion. Tighter the coil, the more explosive the eventual breakout!
What Is the Difference Between Pennant and Triangle Pattern
At first glance, pennants and triangles may appear quite similar visually on the chart but, there are some key differences between these two common continuation patterns.
The main distinction is that the stock chart pennant pattern is usually considered a subset within the larger triangle pattern group. So all pennant triangle formations could be categorized as triangles, but not all triangles have the correct shape to qualify as pennants.
More specifically, pennants must form in the structure of a symmetrical triangle – with both upward and downward sloping convergence trendlines and the two sides mirroring each other. Many triangles like ascending or descending triangles have a flat base line and are asymmetrically angled.
Additionally, pennants often emerge right after a strong advance or sharp decline that creates the flagpole or mast. Meanwhile, triangles can form less dynamically within simple consolidation zones without a significant preceding trend spike.
So while pennants have a triangular shape, not every triangular consolidation meets the exact price structure criteria to be labeled a pennant vs just a general triangle pattern. For example, the rising pennant or the ascending pennant pattern may look pennant-esque but don’t conform to the expected form.
Next time you spot triangle price action, take a closer look to determine whether that pennant stock pattern has the necessary visual cues of a true pennant formation.
How Do You Identify Flags and Pennants
Learning to properly spot pennant and flag patterns takes some practice. But a few key identification tips can help you distinguish pennant flag chart pattern.
Bull Pennant vs Bull Flag
While often grouped together, remember that pennants and flags have some subtle structural differences:
- Flags form mostly rectangular consolidations, while pennants take shape as symmetrical triangles
- Bull flags show shallow pullbacks in an uptrend while the bear pennant pattern features deeper retracements back to support.
- The bull flag pole can be more angled, versus pennant poles being more visually vertical
- Flags often appear on shorter intraday time frames while pennants emerge over longer daily/weekly periods.
The best way to improve your eye is to scan historical charts and identify past examples. For instance, during 2022’s bear market, we saw bear pennant chart pattern formations repeatedly on the S&P 500 weekly chart stalling upside bounces.
Drilling down to a 15-minute chart, you may then notice bull flags taking shape short-term within the rebound moves out of oversold conditions.
Being able to distinguish bull pennant vs bull flag across time frames takes practice but boosts your chart reading skills significantly!
How Reliable Are Pennant Patterns
Historical data shows pennant trading pattern formations to provide effective continuation clues but proper context is required.
Now, not all pennant structures have equal quality, the reliability varies depending on factors like:
- Trend alignment – The bull pennant chart pattern is more robust in a clear uptrend for example.
- Timeframe – better signals formed on daily/weekly charts versus very short-term noise.
- Volatility – more liquid markets see cleaner trend development and pattern signaling.
What Is the Success Rate of the Pennant Pattern
According to analysis research based on over 120,000 patterns, symmetrical pennants successfully breakout in the expected prevailing trend direction about 67% of the time.
Pennant pattern chart success rate
However, about 33% of bullish pennant chart patterns end up reversing or failing, and only about 35% of the time the measured move price target was meet. So while certainly not foolproof, the 2:1 bullish success ratio reveals a meaningful edge for traders.
Next, let’s discuss strategic entries, stop losses, targets, and more for capitalizing on pennants.
Trading Pennant Formations - Entry and Exit Strategies
The textbook entry for trading pennants is waiting for the:
- breakout above bullish resistance
- or breakdown below bearish support.
This break confirms the consolidation is resolving in line with the prevailing trend. Consider entering at/above resistance for buys or shorting at/below support but ensure volume is supporting the pennant pattern chart on the break for added confidence before entering the trade.
Initial stop loss strategies for pennants generally involve placing exits on the opposite side of pattern support/resistance. So if going long, put stops under pattern lows and vice versa.
For profit-taking, a common pennant price target projects the height of the preceding pole upwards/downwards from the breakout level. So if the pole preceding the pennant was $10, that would signal a $10 profit target.
Combining favorable risk/rewards based on the pennant pattern chart structure with smart entries timed off momentum shifts often delivers the best pennant trades.
Benefits and Risks of Trading a Pennant Formation
Both the bearish pennant chart pattern and the chart pattern bullish pennant can offer useful trading signals but also come with drawbacks to consider. Let's examine the key pros and cons.
Pros:
- Clear visualization of both consolidation and potential breakouts
- Quantifiable with projected price targets to plan reward
- Frequent pattern across stocks and forex providing opportunities.
Cons:
- Two out of three pennants see continuation but failures still occur
- Breakout needs volume confirmation to avoid head fakes
- Shorter-term pennants prone to false breaks before establishing trend.
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