How to Draw Pennants Pattern Correctly

The pennant pattern is similar to the flag pattern and is characterized by a brief pause in a dynamic market move. Both patterns are preceded by a sharp and almost straight line move on heavy volume, indicating that the market has gotten ahead of itself and needs to pause before continuing in the same direction. Pennants are considered to be among the most reliable continuation patterns and are rare to produce a trend reversal.

Pennants are easy to spot, as they resemble a small horizontal symmetrical triangle, formed by the consolidation of prices. Figures 6.6b show an example of how these patterns look like. The steep price advance preceding the formation can be observed, as well as the sudden drop-off in activity as the consolidation patterns form and the sudden burst of activity on the upside breakout.

Construction of Pennants 

The pennant pattern is identified by two converging trendlines that resemble a small symmetrical triangle. It is more horizontal in shape than the flag pattern. An important requirement for the pennant pattern is that volume should dry up noticeably while the pattern is forming. These patterns are relatively short-term and should be completed within one to three weeks. Pennant patterns that occur in downtrends tend to take even less time to develop and often last no longer than one or two weeks.

The pennant pattern is considered complete when the upper trendline is penetrated in an uptrend or the lower trendline is breached in a downtrend. The breaking of the trendlines should take place on heavier volume, with upside volume being more critically important than downside volume. As usual, when the pattern is complete the market is likely to continue in the direction of the trend.

Measuring Implications 

Pennants are referred to as "flying at half-mast" because they are formed after a sharp advance or decline, called the flagpole. The term "half-mast" suggests that these minor continuation patterns tend to occur around the halfway point of the move. The price movement after the trend has resumed is usually expected to be similar in magnitude to the flagpole move, prior to the formation of the pattern.
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