Section 5:
Bullish Continuation Patterns
Bullish Pennant
Definition:
A bullish pennant is very similar to a bullish flag. Like the bullish flag, the bullish pennant starts when a stock stages a big upward move in a short period of time.
The difference between a flag and a pennant is that the pennant forms with converging support and resistance levels. The support and resistance levels are coming to a head as buyers and sellers becoming increasingly aggressive. Eventually the tension reaches the apex of the bullish pennant, at which point the stock usually breaks higher.
Nuance:
Bullish pennants are typically short-term patterns that recur within the context of strong bullish trends. Bullish pennants offer quicker entry points than bullish flags. That’s because of the convergence of support and resistance. This convergence also offers a tighter stop loss with which to manage risk.
Application:
A bullish pennant is confirmed once the stock crosses above the upper-end of the pennant, which is defined by the downward sloping resistance line. A bullish pennant is rejected if the stock breaks down below the upward sloping support line.
Figure 5.4
Example:
Shares of Chipotle Mexican Grill (CMG) traced a bullish pennant by starting with a big burst higher in a short period of time as shown in Figure 5.4. The stock surged from $80 to $105 in a matter of a few weeks. In the following weeks, the stock bounced back and forth between converging support and resistance levels.
Notice how once the stock broke the bullish pennant it never looked back. A stock is unlikely to retest the downward sloping resistance line of a bullish pennant. Once the stock breaks above diagonal resistance, it generally trends higher.