Definition
A Pennant Pattern is a chart formation used in technical analysis that indicates a possible continuation of the existing trend, usually after a significant price movement. This pattern looks like a small symmetrical triangle, also referred to as a pennant, that begins wide and converges as prices move. The breakout from the pennant is usually in the direction of the preceding trend.
Key Takeaways
- The Pennant Pattern is a continuation chart pattern used in technical analysis that is typically seen in the period of consolidation after a strong price movement.
- The pattern is named so because it resembles a pennant shape, with a large move in stock, the flagpole, followed by a small rectangle shape, the pennant, which is made by converging trend lines.
- The Pennant Pattern is used by traders to predict the continuation of a trend in the same direction as the initial large movement, providing investors with potential buying or selling opportunities.
Importance
The Pennant Pattern is a crucial term in finance, particularly in the field of technical analysis where it’s used to predict market trends.
It’s a continuation pattern, typically appearing mid-trend, and signifies a brief consolidation period before the market continues in its original direction.
The pattern resembles a small triangular flag, or ‘pennant’, attached to a ‘flagpole’ represented by the sharp price movement proceeding it.
Traders pay close attention to pennants as the breakout, either upward or downward, following the consolidation period often provides profitable trading opportunities.
Therefore, understanding and identifying the Pennant Pattern can play an essential role in making strategic, profitable trading decisions.
Explanation
The Pennant Pattern, used in technical analysis of financial markets, plays a crucial role in identifying the market’s potential future movement. A Pennant Pattern forms when there is a large movement in a stock, followed by a consolidation period with converging trendlines, shaped like a triangular flag or a pennant, and then follows with a breakout movement in the same direction as the initial large movement.
This breakout pattern, often accompanied by heavy volume, provides a hint where the price of the asset is likely to move. This, in turn, helps investors and traders make informed decisions.
Specifically, a Pennant pattern is utilized as a predictive tool in the field of financial trading. Traders pay close attention to these patterns as they are usually followed by a continuation of the current trend, providing an opportunity for a profitable trade.
By identifying these patterns early, analysts can predict price breakouts and use this information to buy or sell securities with a higher degree of confidence. A crucial aspect of this pattern is its short-time-frame, which generally lasts less than three weeks, making it more applicable for short-term trading strategies.
Examples of Pennant Pattern
The Pennant Pattern in finance and technical analysis is a continuation pattern often observed in the stock markets. It resembles a small symmetrical triangle, called a pennant, after a sharp move in the market, referred to as the flagpole.
**Microsoft Corporation (MSFT)**: In August 2020, Microsoft’s stock price showed a pennant pattern. After a sharp rally in stock prices (the flagpole), the prices experienced a brief period of consolidation where the highs and lows converged towards each other (forming the pennant). Afterward, the pattern was resolved with a significant price increase, continuing the previous upward trend.
**Gold Prices in 2011**: During this period, the price of gold showed a strong upward move (flagpole) followed by a small symmetrical pennant indicating market consolidation. Once the pennant pattern was broken, the prices soared higher, maintaining the existing upward trend.
**Bitcoin in 2017**: Bitcoin trading chart has repeatedly formed Pennant Patterns. At the end of 2017, after a rapid rise in value, the cryptocurrency exhibited the pattern. The pennant breakout led to a strong continuation in the upward trend, leading to Bitcoin’s historic price peak in December
Remember, the pennant pattern is just a technical analysis technique and doesn’t guarantee future movements. Always combine such techniques with other forms of analysis and do in-depth financial research or consult with a financial advisor.
Pennant Pattern FAQs
1. What is a Pennant Pattern?
A pennant pattern in finance is a continuation price pattern, often seen in the technical analysis of financial markets. It is a short-term pattern that signifies a slight pause in the market following a strong price movement, after which the previous trend resumes.
2. What does a Pennant Pattern look like?
A pennant pattern is formed when there is a large movement in the price, followed by a consolidation period with converging lines, and then a breakout movement in the same direction as the initial large movement. It somewhat looks like a small triangle or a flag, reaching towards the same direction as the previous trend.
3. How to trade the Pennant Pattern?
Traders will often enter new positions once the price breaks out of the pennant formation in the direction of the initial move. When the price breaks out to the upside, it triggers a buy signal. Conversely, a break to the downside signals a sell command.
4. Is the Pennant Pattern bullish or bearish?
The pennant pattern can be both bullish and bearish. Bullish pennants occur when the price dramatically rises, followed by a period of consolidation, before resuming the upward move. Bearish pennants, on the other hand, occur when there is a sharp price drop, followed by a rebound that narrows over time, before resuming the downward trend.
5. How reliable is Pennant Pattern?
Like any trading pattern, the pennant pattern isn’t 100 percent foolproof and requires confirmation for its effectiveness. However, it is often considered a reliable pattern since it commonly leads to a continued trend, whether bullish or bearish.
Related Entrepreneurship Terms
- Technical Analysis: This is the method used to forecast the future price movements of securities by examining past market data such as price and volume. Pennant Pattern is a part of technical analysis.
- Trend Lines: These are lines drawn on a price chart that signifies an overall direction (upward or downward) in which the price of an asset has been moving. The Pennant Pattern is typically formed between two trendlines.
- Breakout: This is a stock price moving outside a defined support or resistance level with increased volume. A breakout is expected after the formation of a Pennant Pattern.
- Price Volume Trend (PVT): This technical analysis indicator aims to determine a security’s price direction by considering both the changes in its price and its volume. It is beneficial in interpreting Pennant Patterns.
- Consolidation: This term refers to a period of indecision in the market when the prices move sideways. A Pennant Pattern is generally formed during the consolidation phase of a major price movement.
Sources for More Information
- Investopedia – a comprehensive online resource for finance and investing related topics.
- BabyPips – an easy-to-understand guide for teaching beginners how to trade the forex market.
- The Balance – a source of personal financial information, providing clear, practical, and straightforward advice.
- MarketWatch – a financial information website providing business news, analysis, and stock market data.
