What is a Pennant?

In technical analysis, a pennant is a type of continuation pattern formed when there is a large movement in a
security, known as the flagpole, followed by a consolidation period with converging trend lines - the pennant
- followed by a breakout movement in the same direction as the initial large movement, which represents the
second half of the flagpole.


Pennants are continuation patterns where a period of consolidation is followed by a
breakout used in technical analysis.
 It's important to look at the volume in a pennant—the period of consolidation should
have lower volume and the breakouts should occur on higher volume.
 Most traders use pennants in conjunction with other forms of technical analysis that
act as confirmation.
Pennants Explained
Pennants, which are similar to flags in terms of structure, have converging trend lines during their
consolidation period and last from one to three weeks. The volume at each period of the pennant is also
important. The initial move must be met with large volume while the pennant should have weakening
volume, followed by a large increase in volume during the breakout.

Here's an example of what a pennant looks like:

In the image above, the flagpole represents the previous trend higher, the period of consolidation forms a
pennant pattern, and traders watch for a breakout from the upper trend line of the symmetrical triangle. 

Trading Pennant Patterns

Many traders look to enter new long or short positions following a breakout from the pennant chart pattern.
For example, a trader may see that a bullish pennant is forming and place a limit buy order just above the
pennant's upper trendline. When the security breaks out, the trader may look for above average volume to
confirm that pattern and hold the position until it reaches its price target.
The price target for pennants is often established by applying the initial flagpole's height to the point at which
the price breaks out from the pennant. For instance, if a stock rises from $5.00 to $10.00 in a sharp rally,
consolidates to around $8.50, and then breaks out from the pennant at $9.00, a trader might look for a
$14.00 price target on the position - or $5.00 plus $9.00. The stop-loss level is often set at the lowest point
of the pennant pattern, since a breakdown from these levels would invalidate the pattern and could mark the
beginning of a longer-term reversal.

Most traders use pennants in conjunction with other chart patterns or technical indicators that serve as
confirmation. For example, traders may watch for relative strength index (RSI) levels to moderate during the
consolidation phase and reach oversold levels, which opens the door for a potential move higher. Or, the
consolidation may occur near trendline resistance levels, where a breakout could create a new support level.

Real World Example

Let's take a look at a real-life example of a pennant:

In the above example, the stock creates a pennant when it breaks out, experiences a period of
consolidation, and then breaks out higher. The upper trend line resistance trend line of the pennant also
corresponds to reaction highs. Traders could have watched for a breakout from these levels as a buying
opportunity and profited from the subsequent breakout.