Various triangle patterns can be found in the market and used to predict the future direction of a stock. Today we are looking at the Pennant pattern.

Context: A pennant is a charting pattern that we use to identify potential momentum in a stock.

Appearance: It is made up of two trend-lines and is easily recognizable. A pennant forms when two counteracting trend-lines converge to create a flag-like formation indicating consolidation. 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.

Breakout Expectation: Generally, when a stock breaks out of a pennant we would expect the share price to move quite rapidly in the direction of the breakout for a number of days. Typically, this move is in the direction of the underlying or main trending formation.

As traders, we look for these breakouts for opportunities to enter new trades or for confirmation to stay in existing ones.

The daily OHLC (open high low close) chart below is demonstrating the development of pennant pattern on Insurance Group Limited (IAG). The trend-lines in blue show the medium-term up-trend and the counter-trend down which converge and meet to create the pennant. IAG has broken out of the pennant in a bullish move. We would expect it to move in the direction of the underlying or overriding trend, which happens to be up.

Only when the share price breaks out of the pennant should we attempt to trade it. In the example provided we would potentially look at entering a ‘bullish’ trade which is a position that profits from share price movement up in anticipation of that occurring.

There are many derivative strategies that we can consider when trading an expected move in a shares price. Some of the products that we look at are options and warrants which we can use to create leverage and trade either a bullish or bearish outlook which could prove to be handy as the situation plays out.

If you would like to find out more about these patterns and potential opportunities please call Traders Circle on 03 80805788 and speak to one of our advisers.