A pennant is essentially a variation of a flag, characterized by converging trend lines that create a consolidation area resembling a triangle. This formation is neutral, meaning the continuation or reversal of the trend depends significantly on the surrounding context. It typically appears as a small wedge following a steep trend, sloping downward after an uptrend and upward after a downtrend. Pennants are often utilized in pattern trading as a continuation signal.

A pennant forms when the price begins to range, with the difference between peaks and troughs decreasing horizontally, exhibiting features similar to a symmetrical triangle. When the price breaks out of this pattern, it usually continues in the same direction, indicating a clear trend. A pennant consists of a significant price movement, known as the “first flagpole,” followed by a consolidation phase with converging trend lines, referred to as the “pennant,” and culminating in a breakout that mirrors the initial movement, termed the “second flagpole.”

This small symmetrical triangle starts wide and narrows as it develops, resembling a cone. Continuation patterns like pennants signify a temporary pause in a trend, suggesting that the previous direction will resume after some time. Although they take on a triangular shape, pennants are much smaller than triangles. While triangles exhibit swing highs and lows as prices fluctuate, a pennant's price action remains confined within a progressively smaller range.

Pennants typically follow sharp price movements, indicating a market breather before a potential trend resumption. These short-term continuation patterns mark a brief consolidation before the prior move resumes, often preceded by a significant advance or decline accompanied by high volume.

Similar to flags in structure, pennants feature converging trend lines during their consolidation phase. The volume during this pattern is crucial; the initial price forming the first flagpole should be backed by substantial volume, while the pennant itself should show decreasing volume, followed by a significant volume spike during the breakout.

Continuation patterns, including ascending triangles, descending triangles, wedges, flags, symmetrical triangles, and pennants, lead to the continuation of an existing trend. Although pennants behave similarly to flag patterns, their appearance is more akin to triangle patterns. Breakouts can occur in either direction, but most pennants are continuation patterns, meaning those in an uptrend are expected to break upward, while those in a downtrend are expected to break downward.

The performance of a pennant is heavily influenced by the initial price change defined by its pole. When comparing a bullish pennant to a symmetrical triangle, the former is typically smaller and shorter in duration, with volume contracting during the pause and increasing upon breakout. A pennant is often seen as a brief pause in a strong trend, with the subsequent movement expected to replicate the preceding move.

A symmetrical triangle is defined by two converging trendlines connecting a series of peaks and troughs. The two patterns differ in duration and the presence of a ‘flagpole.’ A bullish pennant in an uptrend will lead to higher prices, while a bearish pennant will result in lower prices.

To trade pennants, many traders seek to enter new long or short positions after a breakout from the pattern. For instance, when a bullish pennant forms, a trader might place a limit buy order just above the upper trendline of the pennant. Alternatively, one could wait for the price to break out and then look for above-average volume to confirm the breakout before going long.