What the Bull Pennant Shows Us
The bullish pennant is very similar to a bullish flag. Both consist of two phases: a strong uptrend and consolidation. However, the latter phase takes the form of a wedge or triangle in the case of the pennant, unlike the flag where we have a channel.
The consolidation phase must stem from an uptrend, otherwise it’s just a normal triangle. Hence, the move higher is classified as flagpole, with a pennant coming on top of it.
Following the establishment of a short-term peak, the price action starts to consolidate below the highs. Two converging lines connect the higher lows and the lower highs, until these two intersect. In this case, the breakout must take place, unlike the bull flag where the consolidation within the two parallel lines can take much longer.
Similar to flags, both the bull and bear pennants consist of three main elements:
The flagpole - the asset’s price must trade higher in a series of the higher highs and higher lows;
Pennant - a consolidation phase takes place between the two converging lines;
A breakout - a break of the upper trend line activates the pattern, while a break of the supporting line invalidates the formation.
As not one market move happens in a straight vertical fashion, the dominating side must play a tactical game and take breaks between the aggressive moves. Hence, the buyers want to consolidate their recent gains and allow for a minor correction lower. After a temporary pause, the price tends to breakout in an explosive manner.
Similar to a bull flag, the consolidation phase shouldn’t surpass the 50% Fibonacci retracement of the prior leg higher (the flagpole). A pullback that extends below 50% signals that the uptrend is not as strong as it should be. Hence, a strong bull pennant corrects to around 38.2% before breaking the upper trend line.