Bull Pennant (Bullish Continuation)
Introduction | Main Characteristics | Example |
Pennants are amongst the most commonly witnessed continuation patterns. A pennant is similar to a flag and represents a brief pause in a vigorous trend. These patterns typically form exactly in the middle of a rising or declining trend and, as such, are said to "fly at half-mast".
The formation of a Pennant typically takes 1-12 weeks, although most chartists prefer formation over a period of 1-4 weeks, and not much longer. Price action within a pennant is bounded by two converging trendlines and the overall appearance of the pattern is similar to that of a small symmetrical triangle.
Legitimate pennants are always continuation patterns and only rarely does a pattern that resembles a pennant instigate a trend reversal. In order to avoid the pitfalls of wrongly picking a pattern as a pennant, one must adhere to the guideline that a sharp move into the pattern is essential to its legitimacy. A lethargic preceding move would suggest that the pattern is not to be recognized as a pennant.
Pennants form during rising trends (Bull Pennants) as well as during declining trends (Bear Pennants). The action that precedes a bull pennant is typically characterized by a sharp, virtually vertical upwards move that is often accompanied by heavy trading action. The near-vertical price move into the pennant is referred to as its flagpole.
The occurrence of the pennant is depictive of a period within which the trend is "catching its breath" and building vigor for the next phase. Trading activity witnessed during development of a pennant is usually characterized by tepidness, that is until the pattern is complete.
In the case of the bull pennant, a breakout above the upper pennant line completes the pattern and triggers the continuation of the rally. This breakout typically comes with a rash of activity as price soars towards the target.
The measurement of the target for a pennant is rather straight-forward. The trader measures the length of the flagpole - the distance from the point at which the rally into the pennant began up to the high point of the pennant - and projects that distance from the breakout point to arrive at a target. The target is usually accomplished fairly quickly.
NYX was in a minor downtrend in Aug '06, when price made a reaction low (at 56.5) and started a solid uptrend on rising volume. The stock had rallied from 56.5 to 78.5, gaining nearly 40% in around 6 weeks. Then, price put in a minor peak and proceeded to consolidate in between two converging trendlines.
Volume declined during the formation of this pattern, giving the bulls a chance to rest before another assault at higher levels. After 4 weeks of trading within an ever-tightening range, price broke out (at 76.0), thus completing a pattern that was now seen as a bull pennant. The rally had resumed.
Volume, which had spiked on the breakout, continued to increase as the stock virtually blasted off reaching the target of the pattern in just over a week.
That target was 97.0, and was calculated using the vertical distance method, wherein the length of the flag was projected from the breakout point. The length of the flag was measured at 21.0 pts (78.5 - 56.5) and this distance was projected from the level of the breakout (76.0) to arrive at the final target.
