ASX Charting Course

Chapter 6

Pennants

Pennants are very similar to symmetrical triangles except they generally occur over a shorter time frame and they tend to be asymmetrical, although they don’t have to be. They also offer more of a bias to continue in the underlying direction than triangles and can be recognised by their squat or squashed corrective nature. They nearly always form as the result of a vertical price move in either direction.

Construction is effected by drawing a resistance line sloping down across the tops of the corrective price bars, generally starting at the recent high. The lower side of the pennant is drawn as a straight line across the bottoms of the corrective price bars.

The first corrective price bar is the first time a lower low, than the previous bar is recorded in an uptrend, than the previous price bar. The following price bars are said to be corrective until we see a new trend emerge or until the formation is complete.

Pennant in an up trend

In the example below the underlying trend is to higher prices and therefore there is a greater probability for price to break out of the pennant to the high side. Nevertheless a break down from the pennant would have also generated a valid sell signal.

This is the most balanced structure. The overhead line is roughly the same angle going down as the support line is going up, hence the symmetrical structure. The direction of the underlying trend provides a bias for the possible direction of the next move, but really given the symmetry of the structure either direction is possible.

Fig 9 © Copyright 2003 CQG, Inc. All rights reserved worldwide

Pennant in a down trend

Pennants will sometimes only consist of the minimum number of bars in the correction, as in the example below. In this case, the pole is formed as a result of a break down from a congestion area higher. The underlying direction to lower prices provides a most probable direction for the break down from the pennant under formation.

Construction is required at the first sign of a retracement to the predominant direction. Three or four bars is the minimum requirement and will generally yield at least the start of a pennant, if not a complete pennant as in the example below. However the pennant could change shape and form into a more complex triangle or flag shape.

A down market pennant is far more likely to produce a break down to lower prices, than a break out to higher prices.

fig 7 © Copyright 2003 CQG, Inc. All rights reserved worldwide