Next, we will learn about 'Pennants' and how to interpret them in the price chart.
What are Pennants in Technical Analysis?
A pennant or a flag is created when there is a sharp movement in the stock either upward or downward. This is followed by a period of consolidation that creates the pennant shape because of the converging lines. Then a breakout movement occurs in the same direction as the big stock move. Pennants are similar to flag patterns and tend to last between one and three weeks.
At the initial stock movement there is a significant volume which is followed by weaker volume in the pennant section, and then rise in the volume at the breakout.
How to interpret this pattern?
This chart pattern is identified by converging two trend lines and this convergence is more horizontal in formation. This pattern also closely resembles a small symmetrical triangle. Volume declines when the formation of this pattern happens. The price breakout from pennant should duplicate the size of the move preceding it. Time taken to form a Pennant is maximum 15 – 20 candles approx.
Below is the formation of Pennant in the daily chart of BSE Sensex:
Price target and Stop-loss:
The price target for pennants is set by measuring the initial flagpole's height to the level in which the price breaks out from the pennant. The stop-loss level is at the lowest price of the pennant pattern, as the breakdown from these levels could mark the starting of a longer-term reversal.
Pennants are formed in the short term and should be completed between one to three weeks. The prior trend continues after the breakout with the burst of volume.