Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technical analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Analysis in simple terms is the study of historic price movements in a chart in search of patterns or consistently traded support and resistance levels. Today we are looking at a specific chart pattern called a Pennant.
Appearance: A pennant pattern comprises of:
- A strong long-term trend line, either bullish or bearish.
- A counter trend forming towards the long-term trend line coming to form a triangle.
- A breakout from the point of the triangle in any direction.
Pennant Pattern: This pattern is one of the most reliable patterns. You can see that when the stock comes back to the long-term trend line, it will break out of the pennant and then usually continue in the direction of the breakout for a while.
Important Note: To time this pattern correctly usually takes a strong understanding of the next direction. If the pennant forms on an up-trending stock, but you believe from a fundamental point of view that it is away to fall, you could use this technique to your advantage as the stock tends to follow for a few days after the breakout.
Example: Bank of Queensland Limited
BOQ has been in a midterm downtrend for three months now, which is a continuation of the 2-year downtrend, with the share price recently bouncing off a key support level that goes back to February. The share price has now rallied back to test the previous support as resistance, around $9.10. With today’s move pushing the price to the exact resistance level in question, we will likely see a breakout of the pennant soon, which will give us a clearer view on the stock’s direction in the short-term. Since the share price can break in either direction, we will have to wait to see which way it does. Also, if you follow Carlos’s rules, you will know that stocks tend to continue heading in the breakout direction for two or more days.
If you would like to learn how to pick a stocks direction, then Join us at our live face to face two day “Technical Trading for the Australian Market” course.
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