Pennants are among the most reliable of continuation patterns and only rarely produce a trend reversal. Figures 6.6b show what these two patterns look like. To begin with, notice the steep price advance preceding the formations on heavy volume. Notice also the dramatic drop off in activity as the consolidation patterns form and then the sudden burst of activity on the upside breakout.
Construction of Pennants
The pennant is identified by two converging trendlines and is more horizontal. It very closely resembles a small symmetrical triangle. An important requirement is that volume should dry up noticeably while each of the patterns is forming.
Pennant patterns are relatively short term and should be completed within one to three weeks. Pennants in downtrends tend to take even less time to develop, and often last no longer than one or two weeks. Pennant patterns are completed on the penetration of the upper trendline in an uptrend. The breaking of the lower trendline would signal resumption of downtrends. The breaking of those trendlines should take place on heavier volume. As usual, upside volume is more critically important than downside volume.
Pennants are said to “fly at half-mast” from a flagpole. The flagpole is the prior sharp advance or decline. The term “half-mast” suggests that these minor continuation patterns tend to appear at about the halfway point of the move. In general, the move after the trend has resumed will duplicate the flagpole or the move just prior to the formation of the pattern.Labels: Price Action Patterns