3# Bullish Pennant (Continuation Pattern)

• Bullish pennants involve two distinct parts, a near vertical, high volume flag pole and a symmetrical, low volume triangular consolidation comprised of four points and an upside breakout.

• The triangular consolidation during the formation of the pennant is very much like a symmetrical triangle and this implies that traders feel comfortable with the current price.

• The actual pennant formation of a bullish pennant pattern must be less than 20 trading sessions in duration

• Most bullish pennant patterns occur at the middle of the larger move higher for a stock.

• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. 

If the stock closes below this level (now support) for any reason the pattern becomes invalid

Bullish pennants are very close cousins to bull flags, in fact, there is only one major difference, the consolidation after the flag pole is triangular (pennant-shaped) as opposed to being parallel (flag-shaped). Like flags, pennants are favored among technical traders because they almost always lead to large and predicable price moves. Finally, like flags, pennants usually take shape at the mid point of a major move higher.

The first part of the pennant pattern is often called the flagpole or mast. During this phase the stock price skyrockets to a reaction high (a) on some positive fundamental development. Very often this will be the unveiling of a new product, a favorable legal resolution or a positive earnings surprise but the change in price is near vertical as would be sellers are overwhelmed by new buyers caught-up in the euphoria of the moment. As the stock soars speculators that were smart enough to have purchased the stock at lower levels begin selling.

At this point the second phase or pennant portion of the pattern begins. Because the flow of news and investor sentiment is overwhelming positive, most of the stock sold by speculators is easily absorbed in the beginning but as time passes fewer investors seem willing to pay the current price. Slowly, the stock price begins to falter on dramatically reduced volume. The descent is slow because bullish sentiment is still very strong and after several days of minor weakness, a brief rally begins and a minor low is set (b).

Sensing an opportune time to enter new positions buyers begin to return, pushing the stock very near the most recent high but because volume is light this rally is easily rebuffed and a slightly lower high (c) is established before the price turns lower. The new round of selling sends the stock modestly lower on reduced volume. After several more sessions the stock approaches the lows made at point (a) but volume expands and a higher low is set at point (d). This higher low establishes the parameters of a very small symmetrical triangle pattern. As the stock begins to move higher from point (d) volume increases dramatically, buyers overwhelm those taking profits. Over the next 1-2 sessions the stock moves through the high set at point (c) and volume surges further. This triggers an upside breakout point (e). The next session several Wall Street firms either make new "buy" recommendations or reiterate existing recommendations.

The stock opens higher and goes on to make significant new highs in the weeks ahead.