How to Trade the Bear Pennant Pattern

The bear pennant is a bearish chart pattern that aims to extend the downtrend, which is why it is considered to be a continuation pattern. It works in the same manner as a bull flag, with the only difference being that it is a bearish pattern looking to push the price action further lower after the period of consolidation. 

Unlike the flag chart pattern, where the price action consolidates within the two parallel lines, the pennant uses two converging lines for consolidation until the breakout occurs. 

In this blog post we look at how the bearish pennant works, its structure, strengths and weaknesses. We will also share a simple strategy to demonstrate how to trade a bear pennant pattern and make profits.

What the Bear Pennant Shows Us 

The bear pennant consists of two phases: a strong downtrend, and a period of consolidation that follows the downtrend. The former starts when the sellers push the price action lower to create a series of the lower highs and lower lows. 

The second phase commences when the sellers take a step back after creating the short-term low. This temporary pause is characterized by the triangular consolidation, where the price action moves between the two converging lines. As with the bear flag, the consolidation phase must stem from a downtrend, otherwise it’s just a normal triangle. 

The consolidation phase is concluded once the sellers secure a breakout. Unlike the bear flag, where the consolidation can last for a long time, as the two trend lines run in parallel, the breakout should take place given that the upper and lower trend lines are converging. 

Therefore, bear pennants consist of three main elements: 

The flagpole - the asset’s price must trade in a series of the lower highs and lower lows;
Pennant - a consolidation phase takes place between the two converging lines;
A breakout - a break of the lower trend line activates the pattern, while a break of the upper trend line invalidates the formation.

The pause is not just used by the buyers to force a rebound following the creation of a new low. Sellers, who are in control of the price action, use this temporary pause to consolidate their gains and prepare for the next push lower. 

Similar to a bear flag, the consolidation phase shouldn’t surpass the 50% Fibonacci retracement of the prior leg lower (the flagpole). A pullback that extends below 50% signals that the downtrend is not as strong as it should be. Hence, a strong bear pennant corrects to around 38.2% before breaking the lower trend line. 

Strengths and Weaknesses

We said earlier that the bear pennant is a continuation pattern as it tends to help the existing downtrend to continue. Arguably, the biggest strength of a bear pennant is that it helps traders identify the stage at which the trend is currently in. Therefore, the pennant makes life easier for traders, as it provides them with precisely defined trading levels, thanks to the flagpole and pennant.

A formation that checks all three boxes (flagpole, a pennant, and a breakout) with a correction ending at around 38.2% is a textbook bear pennant pattern. The shorter and milder the correction, the stronger the downtrend and the ultimate breakout usually is. 

Pennants share the same weakness with flags - the prolonged consolidation phase can result in a reversal pattern. For this reason, it is important not to enter the trade before the breakout occurs and to always consult other technical indicators in confirming the breakout.

Spotting the Bear Pennant

As with every chart pattern, we take it step-by-step in spotting the specific chart pattern. First, the downtrend has to be identified. Second, the consolidation phase should take the form of a pennant, which brings us to the breakout - the third and final step before we potentially enter the market.

In the NZD/USD 4H chart below we see the sellers being in control as the price action is moving lower. Prior to the downtrend, NZD/USD had traded near the highs, with two failed attempts to break above the horizontal resistance at the top of the chart. 

This failure led to the price action starting a downtrend with the series of the lower lows and lower highs. At the end of the initial move lower (the flagpole), the price action rebounded near the levels of the previous swing low - the horizontal support.

The consolidation phase is then initiated with the buyers pushing the price action from the lows. After three successive lower highs and failures to extend the rebound, the sellers regain control of the price action and aggressively push the price action below the pennant. Hence, the breakout is secured and we will now be moving forward to define the trading setup.

Trading the Bear Pennant Pattern

We said earlier that you are advised to wait for a breakout to take place before entering the long trade to protect yourself from a potential reversal. Remember that until the breakout takes place, the bear pennant is still in “draft” mode and the price action can always reverse the trend and break out higher.

Chart patterns provide us with two options for entry. Either we enter the market as soon as the breakout candle closes below the lower line of the pennant, or eventually decide to wait for a throwback, when the price action returns to the “crime scene” to retest the broken pennant. 

The latter offers a great risk-reward since the entry is at a higher price and the stop loss is very close to the entry, hence, you are risking very few pips. The former makes sure that you don’t miss out on a trade, as there are no guarantees that a throwback may take place at all, which is exactly what happens in this case.

The strength of this trend could be connected to the fact that the buyers registered multiple failures to clear the horizontal resistance, which made them exhausted and exposed. Hence, the breakout was really strong, without offering us the second option. 

Therefore, entry is located where the breakout candle closed. A stop loss is placed within the territory of a pennant, as any move and close above the supporting line invalidates the pattern. 
Take profit is defined by copy-pasting the flagpole, from the point of the breakout (the diagonal trend line). The end point of the trend line signals a level where the bear pennant pattern is completed. 

Given the overall strength of the downtrend, our take profit order is hit in a matter of a few days. We risked around 20 pips in this trade to earn 110 pips, which makes this an extremely attractive trading setup.