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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading by Tim Knight

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Chapter 18

Pennants

The pennant pattern is extremely similar in most respects to the flag pattern (see Chapter 13), except that its lines are convergent rather than parallel. The two lines containing the price bars point toward a common end, and this consolidation pattern typically suggests a continuation of the trend.

Some of the patterns in this book can be quite long-term, spanning years or even decades. The pennant pattern is nothing of the sort. It is, instead, a rather short-term pattern typically lasting just a few weeks, and it is a continuation pattern, allowing a security to take a breath before moving in its dominant direction.

DEFINITION OF THE PATTERN

The first requirement for a pennant pattern is that it be preceded by a strong move in the first place. That move can be up or down, but it must be strong and sharp, since the entire basis for a pennant pattern is that it represents a brief pause in the action of an overall powerful move. Even though prices may form pennant patterns in the midst of markets that are meandering, the fact that they aren't in the context of a strong move negates their import.

Next, the pennant should be countertrend to the general trend. Because of its countertrend nature, the pennant should be downward sloping for a bullish move and upward sloping for a bearish move. It is acceptable for the pattern to be flat, in the form of a symmetric triangle, irrespective of direction. Buying or selling action is supposed to abate during the formation ...

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