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.
Measuring Implications
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.
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Price Action Patterns