The pennant pattern is a short-term continuation formation that signals a brief pause before a strong trend resumes. Similar to flags but with converging trendlines, pennants represent tight consolidation after explosive moves. Learning to trade pennants can help you capture powerful breakouts with excellent risk-reward ratios.
What is a Pennant Pattern?
A pennant consists of two parts: a strong, impulsive price move (the pole) followed by a small symmetrical triangle consolidation (the pennant). Unlike rectangles or channels, the pennant has converging trendlines that form a small triangle. The breakout typically continues in the direction of the prior move.
Pattern Components
- Pole: A sharp, vertical price move with high volume establishing the trend direction.
- Pennant: A small symmetrical triangle with converging trendlines and declining volume.
- Breakout: Price breaks out of the pennant in the direction of the pole.
Flag vs Pennant: Flags have parallel trendlines forming a rectangle or channel. Pennants have converging trendlines forming a small triangle. Both are continuation patterns with similar trading implications.
Bull Pennant
A bull pennant forms during an uptrend and signals continuation higher.
Bull Pennant Characteristics
- Strong Rally: Sharp upward move creates the pole on high volume.
- Small Symmetrical Triangle: Converging trendlines form after the rally.
- Volume Contraction: Volume decreases significantly during pennant formation.
- Upward Breakout: Price breaks above the upper pennant line on expanding volume.
Bull Pennant Example
AMZN rallies from $150 to $180 in three days on 3x normal volume (pole). Over the next five days, it consolidates between $175-180, with lower highs and higher lows converging (pennant). Volume drops 60%. AMZN breaks above $180 on strong volume, targeting $210.
Bear Pennant
A bear pennant forms during a downtrend and signals continuation lower.
Bear Pennant Characteristics
- Sharp Decline: Impulsive downward move creates the pole.
- Small Symmetrical Triangle: Converging trendlines form after the decline.
- Volume Contraction: Volume decreases during the pennant.
- Downward Breakout: Price breaks below the lower pennant line.
Bear Pennant Example
XYZ stock drops from $100 to $75 in four days on heavy selling (pole). Over the following week, it consolidates between $75-82 with converging lines (pennant). XYZ breaks below $75, targeting $50.
Trading Pennant Patterns
Pennants offer clear entry points with defined risk and excellent reward potential.
Entry Strategies
- Breakout Entry: Enter when price breaks out of the pennant with volume expansion. Most reliable method.
- Anticipation Entry: Enter within the pennant near the apex, anticipating the breakout direction based on the pole.
- Pullback Entry: Wait for breakout, then enter if price pulls back to the pennant boundary.
Volume Analysis
Volume patterns are critical for pennant confirmation.
- Pole Formation: High volume confirms the strong directional move.
- Pennant Formation: Volume should contract significantly as the pattern forms.
- Breakout: Volume should expand sharply, confirming the resumption of the trend.
Key Rule: A breakout on below-average volume is a warning sign. The best pennant breakouts show volume expansion of 50% or more above the pennant period average.
Price Target Calculation
The measured move target equals the length of the pole projected from the breakout point.
Target Calculation
- Pole start: $150
- Pole end: $180
- Pole length: $30
- Breakout point: $180
- Price target: $180 + $30 = $210
Stop Loss Placement
- Below Pennant Low (Bull): Place stop below the lowest point of the pennant.
- Above Pennant High (Bear): Place stop above the highest point of the pennant.
- Opposite Trendline: Place stop just beyond the opposite pennant boundary for tighter risk.
Ideal Pennant Characteristics
The best pennant patterns share certain qualities.
What to Look For
- Strong Pole: The initial move should be sharp and impulsive, not gradual.
- Short Duration: Pennants typically form over 1-3 weeks. Longer consolidations weaken the pattern.
- Tight Consolidation: A small, well-defined pennant is more reliable than a loose, wide one.
- Volume Dry-Up: Significant volume contraction shows the pause is genuine, not distribution.
- Trending Market: Pennants in trending markets have higher success rates.
Pennant vs Similar Patterns
Understanding the differences helps with proper identification.
Pennant vs Flag
- Pennant: Converging trendlines forming a small triangle.
- Flag: Parallel trendlines forming a rectangle or channel.
- Both: Continuation patterns with similar trading strategies and targets.
Pennant vs Symmetrical Triangle
- Pennant: Preceded by a strong pole, forms quickly (1-3 weeks).
- Symmetrical Triangle: Not necessarily preceded by a pole, forms over longer periods (weeks to months).
- Both: Have converging trendlines, but pennants are shorter-term continuation patterns.
Common Mistakes
Avoid these errors when trading pennant patterns.
- Weak Poles: A gradual move is not a pole. Look for impulsive, high-volume moves.
- Extended Pennants: Pennants lasting more than 3 weeks may fail. The pattern loses its energy.
- No Volume Contraction: If volume does not decrease during the pennant, the setup is suspect.
- Forcing the Pattern: Not every small triangle after a move is a pennant. The pole must be substantial.
- Ignoring Breakout Volume: Low-volume breakouts often fail. Wait for confirmation.
Failed Pennants
Not all pennants complete successfully. Here is how to handle failures.
Recognizing Failures
- Opposite Direction Breakout: Price breaks against the pole direction.
- No Volume on Breakout: Breakout occurs but without volume expansion.
- Quick Reversal: Price breaks out but immediately reverses back into the pattern.
Managing Failed Patterns
- Honor Your Stop: Exit immediately when your stop is hit.
- Consider the Reversal: A failed pennant can signal a trend reversal. The opposite trade may work.
- Review the Setup: Analyze whether the pattern was truly valid or if you forced it.
Timeframe Considerations
Pennants appear on various timeframes with different implications.
- Daily Charts: Most common timeframe for swing traders. Good balance of reliability and opportunity.
- Weekly Charts: Longer-term pennants can lead to significant moves over weeks or months.
- Intraday Charts: Useful for day traders, but more noise and false signals.
Combining with Other Analysis
Improve your pennant trading with additional tools.
Helpful Confirmations
- Trend Direction: Trade pennants in the direction of the larger trend for higher success rates.
- Momentum Indicators: RSI and MACD confirming the trend direction adds confidence.
- Moving Average Support: The pennant holding above key moving averages (bull) is positive.
- Sector Strength: Pennants in leading sectors tend to produce better results.
High-Probability Setup
A bull pennant forms in a stock that is up 30% in a week, the pennant holds above the 20-day MA, RSI is above 50 but not overbought, and the sector is leading the market. This confluence greatly increases the probability of a successful upward breakout.
Track Your Pennant Trades
Pro Trader Dashboard helps you analyze which continuation patterns work best for your trading. Track your pennant setups and optimize your strategy with data.
Summary
The pennant pattern is a powerful short-term continuation formation that signals brief pauses in strong trends. Look for impulsive poles followed by tight, well-defined pennants with volume contraction. Enter on breakouts with volume confirmation and set targets using the pole length. Always use stops and be prepared for failed patterns. With practice, pennants can become a reliable part of your trend-following arsenal.
Related patterns: Flag Pattern Trading and Symmetrical Triangle Pattern.