A Bullish Pennant Pattern follows a steep or nearly vertical rise in price, and consists of two converging trend-lines that form a narrow, tapering flag shape. The Pennant pattern shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend.
Apart from its shape, the Pennant pattern is similar in all respects to the Flag. The Pennant is also similar to the Symmetrical Triangle or Wedge continuation patterns however; the Pennant is typically shorter in duration and flies horizontally.
Following are important characteristics for this pattern.
For Pennants, the price trend-lines tend to converge. At the start of the Pennant Pattern, the price spikes, perhaps in response to a favorable product or earnings announcement. Following the price spike, the price fluctuations continue until they taper out and become decreasingly less volatile. This behavior appears on a price chart with the initial price spike forming what technical analysts refer to as the “mast” of the Pennant, followed by a triangular pennant shape.
As the Pennant pattern develops, the volume tends to decrease. Martin Pring notes in his book, Technical Analysis Explained, “a pennant is in effect a very small triangle. If anything, volume tends to contract even more during the formation of a pennant than during that of a flag.” However, as with Flags, when the Pennant completes you will often observe a sharp spike in volume.
Duration of the Pattern
In his book, Technical Analysis of the Financial Markets, John J. Murphy identifies that Pennants and Flags are relatively short-term and should be completed within one to three weeks. He also notes that by comparison, the bullish patterns take longer to develop than the related bearish patterns.
Possibility of Price Reversal
In some rare cases, the price will break against the original price movement, and create a reversal trend. The pattern reversal may be signaled during the Pennant pattern formation by an increase in volume, as opposed to the more typical decrease.
Duration of the Pennant Pattern
The duration of the pattern depends on the extent of the price fluctuations (consolidation). The greater the fluctuations, the longer a pattern will take to develop.
It is commonly held that the length of the mast indicates the potential price increase. Like the Flag, the Pennant is considered to be a pause in an uptrend. Following the Pennant, the price typically jumps to replicate the height of the mast, while continuing in the direction of the inbound trend.
Volume should diminish noticeably as the pennant pattern forms.
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume over the course of the pattern should be declining on average.
Duration of the Pattern
According to Martin Pring, a pattern that exceeds “4 weeks to develop should … be treated with caution”. After 4 weeks, interest in the stock is likely to decrease to point that it is unlikely to continue in a strong uptrend.
No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable and may actually reverse.
This pattern is effectively a pause in an uptrend. The price has moved ahead of itself with a steep rise; therefore market activity takes a break before continuing the uptrend. This pause is reflected in the decreasing trading volume. Similarly, a spike in volume marks the resumption of the uptrend.