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Technical Analysis of Stock Trends
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Friday September 03, 2010 |
Bullish
Pennants
Technically speaking,
a bullish pennant is a sharp, strong volume rally on a positive
fundamental development, several days of narrowing price
consolidation on much weaker volume followed by a second, sharp
rally to new highs on strong volume
Why Does It Happen?
Bullish pennants are very close cousins to bull flags, in
fact, there is only one major difference, the consolidation after
the flag pole is triangular (pennant-shaped) as opposed to being
parallel (flag-shaped). Like flags, pennants are favored
among technical traders because they almost always lead to large
and predicable price moves. Finally, like flags, pennants
usually take shape at the mid point of a major move higher.
The first part of the pennant pattern is often called the flagpole
or mast. During this phase the stock price skyrockets
to a reaction high (a) on some positive fundamental
development. Very often this will be the unveiling of a new
product, a favorable legal resolution or a positive earnings
surprise but the change in price is near vertical as would be
sellers are overwhelmed by new buyers caught-up in the euphoria of
the moment. As the stock soars speculators that were smart
enough to have purchased the stock at lower levels begin
selling. At this point the second phase or pennant
portion of the pattern begins. Because the flow of news and
investor sentiment is overwhelming positive, most of the stock
sold by speculators is easily absorbed in the beginning but as
time passes fewer investors seem willing to pay the current
price. Slowly, the stock price begins to falter on
dramatically reduced volume. The descent is slow because
bullish sentiment is still very strong and after several days of
minor weakness, a brief rally begins and a minor low is set (b).
Sensing an opportune time to enter new positions buyers begin to
return, pushing the stock very near the most recent high but
because volume is light this rally is easily rebuffed and a
slightly lower high (c) is established before the price
turns lower. The new round of selling sends the stock
modestly lower on reduced volume. After several more
sessions the stock approaches the lows made at point (a) but
volume expands and a higher low is set at point (d).
This higher low establishes the parameters of a very small
symmetrical triangle pattern. As the stock begins to move
higher from point (d) volume increases dramatically, buyers
overwhelm those taking profits. Over the next 1-2 sessions the
stock moves through the high set at point (c) and volume surges
further. This triggers an upside breakout (point (e)).
The next session several Wall Street firms either make new
"buy" recommendations or reiterate existing
recommendations. The stock opens higher and goes on to make
significant new highs in the weeks ahead.
How are Technical Targets
Derived?
The technical target for a bull flag
pattern is derived by adding
the height flag pole or point (a) to the eventual breakout level at point (e).
Bullish Pennant
for Tenet Healthcare Corp.
Vital Signs
-
Bullish pennants involve two
distinct parts, a near vertical, high volume flag pole and a
symmetrical, low volume triangular consolidation comprised of
four points and an upside breakout.
-
The triangular consolidation
during the formation of the pennant is very much like a
symmetrical triangle and this implies that traders feel
comfortable with the current price.
-
The actual pennant formation of
a bullish pennant pattern must be less than 20 trading
sessions in duration
-
Most bullish pennant
patterns occur at the middle of the larger move higher for a
stock.
-
Upside breakouts
often lead to small 2-3% rallies followed by an immediate test
of the breakout level. If the stock closes below this
level (now support) for any reason the pattern becomes invalid
bull
flags 
bear flags
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