Bearish Pennants
Similar
to rectangles, pennants are continuation patterns formed after strong moves.
After a
big 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, which is
called a pennant.
While the
price is still consolidating, more buyers or sellers usually decide to jump in
on the strong 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
drop in price, some sellers close their positions while other sellers decide to
join the trend, making the price consolidate 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 made a breakout to 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. That way, we'd be out of the trade right
away in case the breakdown was a fake out.
Unlike
the other chart patterns wherein the size of the next move is approximately the
height of the formation, pennants signal much stronger moves. Usually, the
height of the earlier move (also known as the mast) is used to estimate the
size of the breakout move.
Bullish Pennant
Bullish
pennants, just like its name suggests, signals 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!
Just like
we predicted, the price made another strong move upwards 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 fake outs.
Like 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 in size
but they could signal huge price moves so don't underestimate 'em!
