Pennant Pattern – Volatility Lurks

Overview

What is a pennant pattern? A pennant is continuation pattern that occurs after a stock have a sharp increase in price over time. The increase in price represents the flag pole, and the pennant portion looks like the flag itself, with a pointed end. The pointed flag portion of this pattern is what is known as a consolidation period. This is not to be confused with a flag pattern, which is its own.

Example of a pennant: Stock Chart from https://www.investopedia.com/terms/p/pennant.asp

Formation

Generally a flagpole will occur first, as the share price moves upwards at a rapid pace. Eventually shareholders take some profits and sell shares. When the flag portion of the pennant pattern is forming, it begins very volatile with big swings up and down, and gradually those swings get smaller and smaller. There are lower highs, and higher lows. This creates two lines in the price chart that eventually converge on the right side of the pattern. A recent stock of the day at the time of this writing that is forming this pattern is AMD.

A key part to the formation of the pennant is that volume should be high at the beginning of the pattern, and it should decrease over time as the pennant upper and lower limits converge.

Breakout

As the support and resistance lines eventually meet, the stock price usually either breaks out or collapses downward in heavy price correction. This means the pattern is more risky than your common cup and handle or your double bottoms.

The buy point of a pennant pattern is typically when the stock breaks out passed the resistance line. Be cautious about getting into the stock too early, because if it fails to break resistance, it may plummet down through the support line indicating there is not enough interest from buyers. When the stock breaks down through the lower line of the pennant, some traders like to enter into a short position, betting that the share price will continue downwards.

What's your reaction?
Happy0
Lol0
Wow0
Wtf0
Sad0
Angry0
Rip0
Leave a Comment