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 after the such a pattern. Well, a continuation pattern implies that price is breaking a consolidation area in the same direction like the previous trend.
So, if price was trending to the upside and then just like that is forming a consolidation area (triangle, flag, etc) and then breaks higher, the consolidation area is called a continuation pattern as price breaks in the end in the same direction like the trend before the previous consolidation did.
Of course that the opposite is very much true as well and we are looking at the same conditions to be satisfied, but the price to break the consolidation area in the opposite direction than the one suggested by the previous trend. Pennants are the triangular formation that come after an almost vertical rise in price and after the price is breaking the triangle a strong move to the upside follows.
Being a continuation pattern and a bullish one, we should expect to buy only call options and we should keep in mind that price travels extremely fast after such a pattern. The beauty of it comes from the fact that it has a measured move so basically we know is the pattern is confirmed only by looking at the measured move and seeing if it is coming or not.
The recordings that are coming with this educational series deal with usdjpy price action prior to the break of the all important 100 level as we do have there two pennants and the details about how to trade and interpret them are presented.
Furthermore to add to the above, the pennant is a consolidation area that it is finding a lot of demand on each and every pullback market will attempt.
Complex Nature of Pennants
There is the feeling if looking on the lower time frames, like the five minutes chart, that market will never manage to break into oversold levels as each and every candle is to be bought. Therefore, identifying a pennant on the lower time frames, like the hourly chart, actually is giving us the opportunity to trade call options with a very small expiration date, as we can go trading hourly expiration dates or even five-minute ones.
If the pattern is forming on the bigger time frames, like the four hours or the daily chart, that it is worth mentioning that it is almost never a triangle, even though it is most certainly going to look like one. There is even a saying that a pennant is a triangular consolidation after an almost vertical move to the upside, but that turns out to be incorrect. In terms of Elliott Waves Theory, we’re talking about a so-called double flat pattern that is forming in the so-called triangle and while the moves to the downside, or the c waves, seem to be powerful, in the end they will end with a failure, in the sense that the c wave will fail to take the lows in the previous wave b, and therefore, allowing us to find the perfect striking price for the call option.
That being said, for the ones familiar with Elliott Waves Principle, waiting for the first move after a strong X wave is the perfect entry place. What would be the target? Well, from my point of view, a pennant is almost always an X wave of a bigger degree and rarely a b wave as b waves that look like triangles are limited in both price and time. So I would go with the extremely big difference between the time frame the pattern appears and the expiration date one is choosing in the sense that the expiration date should be smaller than the time frame. For example, if the pennant is forming on the daily chart, then four hours expiration or end of the day are indicated, but only when the option is traded in the second half of the day.
All in all, we’re talking about a complex correction for the consolidation area and complex corrections usually are being followed by a strong push to the upside. A pennant has a measured move as well but when trading binary options one is not taking into consideration the actual distance price is traveling as only one pip to the upside is enough for the option to be a winner, or to expire in the money.
From a fundamental point of view, a pennant is most likely to form ahead of important news releases, like ahead of ECB press conference or ahead of the NFP (Non-Farm Payrolls) that is released on the first Friday of each month as market is creating expectations ahead of such a event and explodes higher in the case the fundamental picture is confirming the technical one.