The pennant is a price pattern quite commonly used in technical analysis. It is formed whenever the price of an asset moves in-between two converging trend lines, alternatively hitting the two of them. Hence, the price curve takes the form of a pennant. Pennants can be either bullish - aiming up, when the price is increasing - or bearish - aiming down, when the price of the commodity is decreasing. Pennants are continuation patterns. They follow a large movement in price, and are considered as a consolidation period. Usually, pennants break out in the same direction of the original large price movement they follow.

What does a pennant look like?

Just like flags, pennants have a flagpole, defined as the movement of the price before entering the pennant, and the breakout, the exiting of the pennant. However, their trend lines are convergent instead of parallel. The initial movement is accompanied by a high volume. During the consolidation period (the pennant), the volume is decreasing, and increases during the breakout. We call the breakout level the price mark at which the price breaks out from the pennant.

How to trade the pennant price pattern?

Traders generally watch for breakouts from the pennant, taking a glance both at the evolution of the price and at the evolution of the volume. If the breakout from the pennant is confirmed, one might expect the asset to gain or lose at least half of the value it gained or lost during the flagpole. On the picture above, the pennant is bullish, since the flagpole is aiming up. For instance, let's consider that the price of the asset flew from 10 to 12 USDT (a 20% increase), before consolidating around 11.50 USDT, and that the breakout level was 11.75 USDT. We could then enter a long position and take profit at around 12.93 USDT, a 10 % increase from the breakout level. A stop loss could be set at the lowest point of the pennant. If the price were to drop below that limit, that would invalidate the continuation pattern, and signal the start of a bearish trend.

Combining pennants with technical analysis indicators

As usual, it is best to trade with several indicators or patterns at once to make more acute predictions. One could imagine confirming the pennant with the MFI indicator to both watch for increasing volume and oversold/overbought signals. On the picture above, the MFI, which combines volume and price trend would rise during the flagpole phase, moderate during the pennant phase, and reach high levels again at the the breakout. A bearish pennant would see the MFI reach particularly low levels during the descending flagpole phase, consolidate around intermediary values during the pennant phase, and reach low levels agains at the breakout.