Page 5 - Module 14 Pattern Formations

Module 14 – Pattern Formations

To trade these chart patterns, you should consider both scenarios (upside or downside breakout)
and place one order on top of the formation and another at the bottom of the formation.

If one order gets triggered, you can cancel the other one. Either way, you’d be part of the action. The
only problem is that you could catch a false break if you set your entry orders too close to the top or
bottom of the formation.

5. continuation patterns – pennants in action

For the purpose of this module, we will discuss the Pennant as one of the preferred continuation
patterns.

At the first glance a pennant pattern looks like a symmetrical triangle chart pattern. While both the
symmetrical triangle and the pennant are continuation patterns with a good degree of reliability,
there are some key differences between the two in terms of their formations.

Both the symmetrical triangle and the pennant have conical bodies formed during a period of
consolidation. Price consistently reaches higher lows and lower highs, creating two converging
Trendlines that form this conical shape. However, the pennant includes a flagpole at the beginning
of the pattern, which is not present in the formation of the symmetrical triangle.

The flagpole is a very important characteristic of the pennant and is created when price suddenly
spikes or dives dramatically in the direction of the current trend, forming an almost vertical line. This
sharp move is accompanied by heavy volume and marks the beginning of an aggressive move within
the current trend. Price then pauses, forming the body of the pennant, before breaking out in the
direction of the trend with renewed vigor.

A second difference between the symmetrical triangle and the pennant is their durations. The
pennant is considered a short-term pattern that forms over a period of days or possibly weeks.
Ideally, a pennant pattern lasts between one and four weeks. A triangle pattern can take much
longer, sometimes forming over the course of months or years. In fact, if a pennant pattern drags
on into its 12th or 13th week, it is usually considered to have become a triangle.

The breakout after a pennant pattern should occur at or near the point where the Trendlines
converge, called the apex. When dealing with a symmetrical triangle, however, it is optimal for price
to break above or below the Trendlines one-half to three-quarters of the way through the pattern.

This means the pattern often never reaches its apex, forming a flat-topped cone rather than an actual
triangle. A breakout is eventually forced one way or the other as price nears the apex. However, a
breakout too early or too late may be indicative of a weaker pattern and a less robust continuation.

Bearish Pennants
Bearish pennant is a short term bearish continuation pattern that occurs during a downtrend,
indicating a pause/small consolidation before continuing its downward moves.

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