Lesson 7: How to Trade Bullish and Bearish Pennants

When the price consolidates, it’s often hard to tell what the market's next big move will be. But by monitoring the price action, charting the trendlines, and spotting pennant patterns, you can gain valuable insights into the market direction after the indecision. 

In this lesson, you’ll learn the difference between bullish and bearish pennants, how to spot them, and the best practices to trade them.  

Discover here how you can trade bullish and bearish pennants during market consolidation.

Lesson Overview

• Pennants are continuation patterns. A bullish pennant forms at the peak of an uptrend, while a bearish one is established at the bottom of a downtrend.  
• In a pennant pattern, a consolidation happens after a significant trend – making it different from triangle patterns.  
• Traders who lock in their profits after a pronounced trend are the primary cause of the price consolidation.
• Both pennant and rectangle patterns signal market continuation after consolidation. However, pennants’ trendlines converge with each other, while rectangles’ trendlines are parallel to one another.

What Are Pennant Patterns?

When you spot a pennant pattern in your price chart, it indicates that the primary trend (either bullish or bearish) will pause for a while. In trading terms, it enters a consolidation phase.  

But after it consolidates, the price will continue its trend before it pauses.  

A price consolidates when neither the buyers nor the sellers pressure the market to move in a certain direction. Since no one’s taking control of the market, the price will simply bounce back and forth within its support and resistance (S/R).  

Read More: TradersUnited - What Are Support and Resistance Levels in Forex?

To spot a pennant pattern on your price chart, you must connect the lows and the highs; lows forming the lower trendline and highs representing the upper trendline. The trendlines must converge in the middle at a similar speed – forming a pennant-shaped pattern.  

Remember, the trendlines must converge. If they are parallel, you might be looking at a rectangle pattern.  

Now, what happens to the market once the price trades beyond the trendline? It signals the end of the consolidation phase and the start of the continuation.  

Bullish vs. Bearish Pennants 

A pennant pattern signals either a bullish or bearish continuation after a market consolidation.  

A bullish pennant appears at the peak of an uptrend and signals that the price movement will pause for a while. After the pause or consolidation, the price will trade even higher.  

On the other hand, a bearish pennant signals a bearish continuation after the declining market consolidates.  

In other words, a bullish pennant indicates a bullish continuation, while a bearish pennant signals a bearish continuation.  

Let’s discuss what you should look at to effectively spot these pennants in your price chart.  

How to Identify Bullish Pennants

A pennant that appears at the peak of an established upward trend is called the bullish pennant. This pattern signals that a strong bullish continuation will happen after the price consolidates between converging support and resistance.  

It’s like the buyers pause before driving the market higher. It could be because of the sellers’ intervention or the buyers’ collective action to lock in profits.  

Here are the two market characteristics that confirm a bullish pennant formation:  

• A pronounced uptrend before the pennant formation.  
• A trendline that converges into a roughly symmetrical triangle.  

A bullish pennant can be confused with a triangle pattern. To avoid confusion, you must remember that, unlike a triangle, an established upward trend should form before the formation of this pennant.  

What Happens to the Market During the Bullish Pennant Formation

You can assume a strongly positive market sentiment towards the asset when a bullish pennant is shown on your price chart.  

However, a consolidation happens because of either of the two things:  

• Sellers expect retracements and try to intervene in the market
• Buyers are locking in their profits by shorting their long positions

In the end, the positive sentiment prevails, and the bullish trend continues.  

How to Identify Bearish Pennants

When a market consolidates and forms a roughly perfect triangle at the bottom of a downtrend, it indicates the formation of a bearish pennant.  

This pennant type is a bearish continuation pattern – it suggests that the climbing price will consolidate for a moment to form a pennant-shaped trendline. Once the pattern is completely formed, the price will trade below the lower trendline (support level) and continue its bearish trend.

What Happens to the Market During the Bearish Pennant Formation

Contrary to its bullish counterpart, the market experiences a negative sentiment, causing the pattern’s preceding price to dip significantly.  

Naturally, sellers holding short positions may lock in their profits by exiting their trades. This would result in a decrease in supply, which would increase demand.  

The change in the market’s supply and demand, coupled with the bulls’ expectations for a bounce back, entails marker indecisions.  

But like in its bullish counterpart, the price tends to trade beyond its S/R level. In the bearish pennant’s case, it will trade below the lower trendline (support level).  

Rectangle Pattern Vs. Pennant Patterns  

Both pennant and rectangle patterns signal a trend continuation after the market consolidation. Additionally, rectangles and pennants can also be bearish and bullish.

Their characteristics have massive overlap; thus, how can you tell which is which?

Simple: look at the support and resistance during the consolidation.

Pennants should have trendlines that converge into each other, forming a roughly symmetrical triangle. On the other hand, rectangles are characterized by trendlines that are parallel to one another. 

Trading the chart is one of the most common strategies technical traders use. However, these patterns don't guarantee returns and can sometimes bring false signals.

Remember to use it with other indicators or ask the community to confirm the signal of the pattern.