Several of our articles have focused on picking out patterns from analytical charts to help detect where price movement will change or if we think it will remain the same. One of the most important patterns to look for is a continuation pattern; one of the key indicators inside a continuation pattern to indicate the movement will stay the same is a pennant. Let’s talk a little more about these two things.
Before even starting to talk about pennants, one should know the difference between a continuation pattern and a reversing one and be able to understand the outcome to follow aftereach such a pattern. A continuation pattern implies that price is breaking a consolidation area in the same direction as the previous trend. A reversal pattern is simply a pattern that trends in a different direction after it at breaks out of its consolidation area.
Pennants form when a triangular patterns price movement is nearly vertical just after a strong move to the upside (the strong move forms the pole of the pennant and the near vertical move forms the flag of it). A continuation will signal that a bullish trend will continue. So one would be wise to buy only call options after the pennant is seen forming. It is important to remember that price usually travels very fast after the consolidation area of a continuation pattern is broken.
What is nice about a pennant as an identifier is that you only need a measured move to get confirmation of the continuation pattern.
So once you get used to seeing them and using them, pennants are a great tool for helping you spot continuation patterns. Once they are spotted, as we staed before, get ready to buy call options because all indications are the previous upswing in price will continue.
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