Pennant graphical price model is a minor, short-term and trend continuation pattern. It shows that the previous direction after its formation will prevail in the future. As for the daily chart the pattern is generally formed within a week. A pennant occurs when price action range is slowly narrowing down. The price reaches the apex of a triangle because of consistent lower highs and higher lows. After the compression at the top of a triangle, the latter will breakout from a pennant in the direction of the most recent dominant trend.
Pennant formations are identical with flag formations because they are very similar in appearance and show up at the same place in an existing trend. Besides this they have the same volume and measuring criteria. The only difference appears when the support and resistance lines converge and the consolidation area resembles a pennant. Pennant is represented by support and resistance levels that are moving towards one another in the shape of an asymmetrical triangle. Support is upward sloping and resistance is downward sloping which visually forms a triangle by concluding price fluctuations within. This pattern is often characterized by a sharp price entering after intensive movement.
This pattern confirms the trend movement direction in case of breaking through:
- a sell signal arise if the pattern is formed in a downtrend and the price falls below the support line (plus certain deviation is possible);
- a buy signal arise if the pattern is formed in an uptrend and the price rises above the resistance line (plus certain deviation is possible).
The price depending on a pennant pattern formation is generally believed to change in the same direction as it was going prior to the pattern by at least the same amount as the price change from the start of the trend to the pennant formation. The target level is calculated in the following way:
In case of a downtrend:
T = BP – (TS – PS)
In case of an uptrend:
T = BP + (PS – TS)
T forms the target price;
BP forms the breakthrough point;
TS forms th trend start point;
PS forms the pattern start point.