Chart Pattern Recognition Series - Pennants - Short Term Bullish / Bearish Continuation (Technorati) Technorati | (Del.icio.us) Del.icio.us | (Digg) Digg | (Blinklist) Blinklist | (Comment) Comments (0)

The pennant pattern is fun to trade, easy to identify and one that I often look for to make quick money. Pennant trades are for short-term (swing) traders, not for buy-and-hold investors. There are four main identification guidelines when it comes to pennants. Here they are:

1.) Price is bounded by an upper and lower trend line. The price here usually goes against the trend: The price will rise in a downtrend and fall in an uptrend.

2.) Three-week Maximum. Pennants are short term patterns and thus should not last more than 3 weeks. Even three weeks is really pushing it. I prefer pennants to last only seven to eleven days. Longer than 3 weeks and the pattern turns into a symmetrical triangle or wedge.

3.) Steep, quick price trend. Pennants should have a very steep price move (up or down) leading into the pattern.

4.) Downward volume trend. Volume will usually trend downward until the break out move occurs.

In order to estimate a target price, follow these simple formula:

(stock price at the start of pennant) – (stock price at start of initial move up or down) = target premium

(stock price at the end of the pennant) + target premium = target price.

You should be warned that this measure rule works between half (bear market) and two-thirds (bull market) of the time, so be conservative when making your estimates.

One real time example of this pattern (assuming the downward breakout occurs soon) would be Lam Research Corporation (LRCX). I mentioned this stock in my last article and this coming week would be prime for this stock to continue its downward breakout. Again, here you can see a sharp downward decline into the pennant coupled with a declining volume trend. The pattern is further helped by the strong level of resistance directly above it which often times will serve as the catalyst needed to break the stock out and continue its decline.

Investor Term of the Day: Escalator Clause
A provision of a contract which calls for an increase in price in the event of an increase in certain costs. For example, an escalator clause may specify that rent due will increase with inflation. also called escalation clause. opposite of de-escalation clause.

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