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Pennant formation with Candlestick analysis




Pennants and Flags are common patterns in western technical analysis.

These formations are visually very apparent and form repeatedly in consolidating markets. The pennant will have consecutively lower tops while also forming consecutively higher lows. One trend line (resistance line) can be drawn through the tops and another line (support line) drawn through the lows. Usually candlestick traders can notice candlestick reversal signals at the top and the bottoms. One can play the intermediate trend from the support line to the resistance line or vice-versa. Keep in mind that if you are noticing the trend lines, there are millions of other traders noticing them too. This is what causes the tops to gradually go lower as traders try to take profits before everyone else. The same situation happens at the bottoms, where traders try to jump in the stock earlier so as not to miss any gains, thus causing higher lows. However, the real play is when the stock or market breaks out of the pennant. The direction is immaterial. As a trader, positions should be established in the direction of the decisive breakout. The stock can rapidly roll in the direction of the breakout as traders follow each other and provide fuel for the rally.

The following chart shows FINANTECH.

The stock rallied from an Inverted Hammer at the end of October till mid November. The stock set successive lower highs and higher lows giving a clear indication of a pennant setting up. The stock broke out in early January with a big bullish candle closing above the perceived resistance line. This was a good entry point as evidenced by the rally that followed it.

Chart courtesy

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