Section 6:
Bearish Continuation Patterns
Bearish Pennant
Definition:
The bearish pennant starts when a stock stages a sharp downward move in a short period of time. The support and resistance converge towards an apex as buyers and sellers becoming increasingly aggressive. Eventually the tension reaches the apex of the bearish pennant, at which point the stock breaks lower.
The difference between a bearish flag and a bearish pennant is that the pennant has converging support and resistance levels. The bearish flag, meanwhile, always has parallel support and resistance levels.
Nuance:
Bearish pennants are typically short-term patterns that recur within the context of strong downward trends. Bearish pennants offer quicker entry points than bearish flags. That’s because of the convergence of support and resistance. This convergence also offers a tighter stop loss with which you can manage risk.
Application:
A bearish pennant is confirmed once the stock closes below the lower-end of the pennant, which is defined by the upward sloping support line. A bearish pennant is rejected if the stock breaks above the downward sloping resistance line.
Figure 6.5
Example:
Shares of Applied Materials (AMAT) traced a bearish pennant over several weeks as shown in Figure 6.5. Notice how highs were repeatedly capped at sequentially lower levels. Also, look at how the lows inched up to higher and higher levels. These two patterns in the highs and lows helped to form the converging resistance and support.
Once AMAT broke down from the bearish pennant, it moved lower. The breakdown below the upward sloping support line was easy to identify with the drop below $18.