Let's talk about the pennant — one of the most interesting technical analysis patterns that I constantly see on charts. It is a consolidation that indicates trend continuation and usually appears somewhere in the middle of a price movement.

What is happening here? After a sharp rally up or down, the price begins to trade within a narrow range, forming a small symmetrical triangle. You see two trendlines — the upper one slopes downward, the lower one slopes upward, and they converge at a point. This is the pennant. It typically forms over a couple of weeks, a maximum of three weeks. If it takes longer, it’s likely to turn into something else or fail.

I like that this pattern works on all timeframes, but it is especially clear on short-term charts. It resembles a flag — both have a sharp move forming a flagpole, followed by a consolidation phase. The difference is in shape: a pennant is a triangle, a flag is a rectangle.

When we talk about a bearish pennant, it refers to a downward trend. It starts with a steep decline, then the price quiets down in consolidation, and continues to fall. When the price breaks below the lower boundary — that’s your signal to go short. For a bullish pennant — the opposite — you go long on a breakout above the upper boundary.

You can enter in several ways. The first — immediately on the breakout in the direction of the trend. The second — wait for the breakout of the pennant’s maximum or minimum. The third — enter on a pullback with trend continuation confirmation. Personally, I prefer the first option if the volume supports the move.

Regarding reliability — there’s an interesting story. John Murphy considered pennants one of the most reliable continuation patterns. But Thomas Bulkovsky conducted a serious study on over 1,600 patterns and got different results. He found that the failure rate of breakouts was about 54% in both directions, and successful moves occurred only 35% of the time in uptrends and 32% in downtrends. The average move after the trigger was about 6.5% of the initial move.

This isn’t very encouraging, but remember that Bulkovsky only looked at short-term fluctuations. If you consider larger moves, the results might be better. The main thing — always use risk management because patterns often fail.

How to calculate the target price? Measure the distance from the start of the flagpole to its top or bottom, then subtract this distance from the breakout level. For example, if the flagpole dropped by $0.80 and the breakout occurred at $5.98, then the target price would be $5.18. Place your stop slightly above or below the trendline depending on the direction.

Overall, bearish pennants and their bullish counterparts are short-term patterns. The breakout should happen within three weeks; otherwise, the pattern will fall apart. The key to success is the quality of the preceding trend. If there was aggressive trading with a sharp rally before the pennant, expect a strong continuation after the breakout. That’s why many traders use pennants together with other analysis tools — it increases the chances of success.