Pennant

The pennant is the first of the patterns to observe when finding a stock. It is a continuation pattern that shows how the stock will keep on growing in value. At this point, the stock appears to be struggling to move up or down in value, but after a while, the stock will break out of the pennant and keep on moving toward the same position it was in at the start.

The pennant reveals:

1. The value of a stock will start to increase or decrease sharply. The change might be the stock gaining or losing a few percentage points of its value. The change should be noticeable regardless of how valuable it is.
2. The value should then start to go in the opposite direction. It will slowly decrease following a sizable increase or it could go the other way around.
3. After a while, the values of the rises or drops in the stock will shrink in size. A stock might change by only a few pennies in value with each candlestick. Sometimes the total volume or the range in which the stock changes in value in a time period might be minimal.
4. After a while, the stock will have little to no change in its value.
5. The pennant will end when the stock suddenly breaks out and experiences an increase or decrease in its value. This should be a full continuation of what the stock was experiencing before the pennant started.

The layout of the pennant will let you know that a stock’s value is either stabilizing or is about to break out. When the trading volume and change in value shrink to next to nothing, it is a sign that something is about to happen. Sometimes you might find that the value could go up or down after a while depending on how the pennant started.

Enter into a pennant when you notice the changes in each wave going down to very low totals. Watch for how the pennant is formed and notice how the stock breaks out of it. You can place a stop-loss order on the opposite end of the trend to safeguard you against the potential of the stock not continuing in the same path or if the pennant lasts a little longer than expected.

Bullish or Bearish?

A pennant can be either bullish or bearish in value. A bullish pennant is one that starts with a slight rally. The price of the stock will go up at the start and then stabilize. After the pennant is formed, the stock will likely move back up in value.

A bearish pennant features a price that drops significantly before the pennant forms. The price might start to go up for a bit, but then the value will decline after the pennant ends. You could probably say the same about any other type of pattern you find. The changes within the pattern are all worth reviewing to anticipate how certain changes might develop and evolve.

The Flag – a Related Pattern

Sometimes a pennant might occur in a more rectangular shape. That is, the value is not necessarily increasing or decreasing by much, but it is still within a steady range. This establishes a flag pattern, what with the candlesticks on a chart moving in a flag-shaped pattern. You can still identify if the flag is bullish or bearish by looking at how it started. The first few price changes in the flag should give you an idea of how the flag is moving up or down in value.

Think of the flag as if it were a series of oscillating waves with the same amplitude throughout. The only difference is that the periods between the highs and lows on that wave will vary. In the end, you would have to enter into your trade when you notice a sizable breakout from the flag.

Can the Pennant Go in the Other Direction?

Most pennants are made to go from left to right. That is, the largest price change will appear on the left while the smallest will go to the right. There are times when a reverse pennant can form. This is where the trading volume and changes in a stock start to increase gradually, eventually moving into one big trade at the end of the pennant.

Reverse pennants are not as easy to find as traditional ones. You are more likely to find a reverse pennant after it is finished. Sometimes these reverse pennants might let you know how the price moves and how bullish or bearish people are about the stock. Just looking at the ends of the reverse pennants will give you an idea of how a stock is evolving.

Strategies for Using Pennants

You should use a few strategies for trading pennants on the market:

• Watch for how the changes in the candlesticks vary as the pennant moves forward. Sometimes a majority of sticks in the pennant are moving upward. In other cases, they might go downward. Either way, it might be better for you to get into the trade after the pennant is fully formed. You could try to make small micro-transactions that last for a few minutes depending on where the pennant is flowing, but even then it might be difficult to determine how long the waves will move along and how many up or down candlesticks will be formed at a time.
• Look for as many pennants in a stock as possible. Reviewing multiple pennants gives you an idea of what the sentiment toward a stock might be. You might see that bullish pennants are becoming larger in size. This suggests that investors are more appreciative of a stock and are willing to invest in it.

• Trade during the upside parts of the stock if possible. Trading at this point helps as you will identify points where the value of a stock will be likely to increase in a shorter period of time. This would only work for a brief moment of time before something starts to shrink in value.
• See if there are any significant outliers in a pennant. These include cases where one stick in the middle is larger than the others. An outlier suggests uncertainty in the stock. When the outliner moves downward, it shows that a possible increase might not be as strong as it could be.
• Look at how long a pennant might be moving. Sometimes the pennant might last for a few days or even some weeks at a time. In most cases, a pennant might last for a few hours. This is because people will respond quickly to changes in a stock. They might notice that a stock that is trending upward and is stable in value could be worth acquiring before the value possibly bursts upward again.