Pennants are very similar to symmetrical triangles except that they generally occur over a shorter time frame and tend to be asymmetrical, although they don't have to be. They also offer more of a bias to continue in the underlying direction than triangles and can be recognised by their squat or squashed corrective nature. They are often best distinguished by the presence of a pole, a vertical move to which the pennant attaches itself.
Construction is effected by drawing a resistance line sloping down across the tops of the corrective price bars, generally starting at the recent high. The lower side of the pennant is drawn as a straight line across the bottoms of the corrective price bars.
Pennant in an up trend
In the example below the underlying trend is to higher prices. There is, therefore, a greater probability for price to break out of the pennant to the high side. Nevertheless a break down from the pennant would have also generated a valid signal, but a signal to sell.
Pennant in a down trend
Pennants will sometimes only consist of the minimum number of bars in the correction, as in the example below. In this case, the pole is formed as a result of a break down from a congestion area higher. The underlying direction to lower prices provides a most probable direction for the break down from the pennant under formation.
Construction is required at the first sign of a retracement to the predominant direction. Three or four bars is the minimum requirement and will generally yield at least the start of a pennant, if not a complete pennant as in the example below. However the pennant could change shape and form into a more complex triangle or flag shape.
A down market pennant is more likely to produce a break down to lower prices, than a break out to higher prices.
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.