Pennant in an Uptrend
A pennant is a continuation pattern that in an upward trend consists of a rise in prices followed by a retracement triangle that usually trends downward, but can be horizontal or upward sloping, and has support and resistance lines that converge creating a triangle shape and contain the price action of the retracement. As a continuation pattern, after a sharp uptrend, the buy signal is given when prices breakout above the resistance line of the pennant and head higher. To see a very profitable pennant, see the High and Tight Flag section.
Pennant in a Downtrend
A pennant in a downtrend is the opposite. Prices fall, followed by a short retracement triangle higher and then a sell signal is triggered when prices breakdown below support of the pennant.
Average Maximum Breakout Gain - Pennant in an Uptrend
To be more precise, the pennant pattern preceding the uptrend should be 45 degrees rather than straight up for best results (Kirkpatrick & Dahlquist, 2010, p. 330). On average, a pennant in an uptrend has an average gain of 25%;
Average Maximum Breakout Decline - Pennant in a Downtrend
Whereas a pennant in a downtrend has an average decline of 19% (Bulkowski , 2005). A pennant should occur within a few weeks, any longer and it is considered a triangle pattern.
Pennant Price Target
A classic chart technician price target for the pennant pattern "is calculated by taking the distance from the beginning of the sharp trend, not necessarily the beginning of the entire trend, to the first reversal in the pattern and adding it to the breakout price." Bulkowski (2008), in his chart research, suggests the following more precise price target calculations:
Traits that Increase the Effectiveness of the Pennant Chart Pattern
Traits that increase the effectiveness of the pennant pattern include (Bulkowski , 2005):
- Pennants perform best in the bottom third of the 52-week price range, regardless of whether it occurs in a downtrend or uptrend.
- "Tight" pennants are preferable to "Loose" pennants. Loose pennants are usually wider, have white space where there is separation between price bar highs and the upper resistance line and the price bar lows and the lower support line.
- Pennant price retracements should go counter to the trend. If the pennant retracement slopes in the direction of the trend, then performance suffers.
Pennant in an Uptrend Chart Example
The chart above of Exxon Mobile (XOM) shows a pennant pattern within an uptrend. Prices moved up from a base and then prices consolidated, creating a countertrend down-sloping pennant. As is typically expected, once prices surpassed the overhead resistance, the uptrend continued.
Pennant in a Downtrend Chart Example
The chart above of Intel (INTC) illustrates a pennant in a downtrend. Prices fall and then consolidate in a counter-trend upward sloping pennant formation. Once prices break below the support line of the pennant, a sell signal would be given, and in this chart, prices fall below. Using Bulkowski's price target formula, a trader would have been able to exit with profit before prices began to move back upwards.
Works Referenced
- Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
- Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
- The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
- The Pattern Site. (2005). Bulkowski’s Pennants . Retrieved June 1, 2012, from http://thepatternsite.com/pennants.html