The stock that you’ve been watching suddenly experienced a sharp increase in price, but it started moving sideways following the breakout. How do you know if this is a brief period of consolidation or the start of a bearish reversal? These kinds of situations are very common for active traders.
In this article, we will look at a bullish continuation pattern, known as a bullish pennant, which can help answer these questions and help you identify profitable trades.
What Is a Bullish Pennant?
Bullish pennants are continuation patterns that occur during a strong uptrend. After a strong move higher, the price moves sideways in a pattern that resembles a triangular flag – or pennant. The uptrend continues when the price breaks out from the narrowing price pattern on above-average volume.
There is a psychological underpinning for the bullish pennant: Short-term traders are simply locking in some or all of their profits following a sharp move higher. Since the market still consists of net buyers, the security resumes its uptrend when these short-term traders have sold out of their positions.
For a detailed breakdown of pennant formations and their variations, see Investopedia’s guide to pennant patterns.
The bullish pennant has several key components:
- Prior Uptrend: The bullish pennant must be preceded by an uptrend, including a sharp move higher on heavy volume. Often times, this is the first leg of a longer-term trend higher with the pennant being a short pause on the way.
- Flagpole: The flagpole is a vertical line connecting the first resistance breakout to the high of the pennant.
- Pennant: The pennant is the symmetrical triangle that begins wide and converges over time until a breakout occurs. While there may not be specific reaction highs and lows, the price action should be contained within the pennant.
Bullish pennants are usually short-term patterns that last one to four weeks. If the duration lasts any longer, the chart pattern is often classified as a symmetrical triangle.
The bullish pennant is also known as a bull flag.
How to Trade Bullish Pennants
Bullish pennants are relatively easy to trade.
Buy signals are generated in the period following a candlestick that closes above the pennant’s upper trend line. When the breakout occurs, traders often look for heavy volume as confirmation. You can also look at other chart patterns or technical indicators for confirmation.
Stop-loss points are placed at the bottom of the pennant. In addition, some traders use a trailing stop-loss point that’s set equal to the pennant’s height.
Take-profit points are typically set by taking the height of the flagpole and applying it to the point at which the breakout occurred to produce an upper limit.
Examples of Bullish Pennants
Let’s take a look at a bullish pennant in Companhia Paranaense de Energia SA (NYSE: ELP) as an example.
In a typical bullish pennant scenario, the initial breakout occurs with strong volume and lasts several days. The stock then experiences a period of consolidation that forms the pennant shape.
The entry point for the bullish pennant would be at the breakout from the pennant formation. The stop-loss is set at the bottom of the pennant and the take-profit is set using the flagpole measurement projected from the breakout point.
The stock breaks out from the pennant formation and reaches the take-profit level before trending sideways for a period of time.
The Bottom Line
Bullish pennants are a continuation pattern that can help you determine if a period of consolidation is a step along the way higher or a potential reversal lower. Using the chart pattern, you can intelligently enter trades complete with take-profit and stop-loss points to limit your risk.
The bullish pennant works best when combined with other forms of technical analysis, including both chart patterns and technical indicators. For example, the on-balance volume (OBV) can help determine the breakdown between buyers and sellers, while the relative strength index (RSI) can show trend strength.
Frequently Asked Questions
How do I distinguish a bullish pennant from a symmetrical triangle?
The main difference is timeframe and context. Bullish pennants form quickly (1-4 weeks) after a sharp upward move (the flagpole), while symmetrical triangles develop over longer periods without requiring a preceding sharp move. If the consolidation pattern extends beyond four weeks, it’s typically classified as a triangle rather than a pennant.
What volume characteristics should I look for?
Volume should be highest during the initial flagpole move, then decline progressively during the pennant formation as the pattern consolidates. On the breakout, volume should spike significantly—ideally above the average of recent sessions. Low volume on the breakout often leads to false signals.
What’s the success rate of bullish pennant patterns?
Studies suggest bullish pennants have a success rate of 60-70% when properly identified with volume confirmation. However, success rates vary based on market conditions, timeframe, and how strictly the pattern criteria are applied. Always use stop-losses and position sizing regardless of pattern reliability.