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 Pattern.
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.
We believe this pattern is one of the most reliable out there and use it often in our trading.
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 there is a long way 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 (ASX: BOQ)
In this example, you can see BOQ has been in a midterm downtrend for three months, which is a continuation of the 2-year downtrend, with the share price recently bouncing off a key support level.
The share price then rallied back to test the previous support as resistance, around $9.10. With the current day’s move pushing the price to the exact resistance level in question, this means 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 would then have to wait to see which way it does in order to trade in that direction.
Want to learn how to trade charting patterns like this?
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