The Bearish Pennant pattern, and how to use it
The bearish pennant is a chart pattern that is formed by a downward sloping resistance level and a converging support level. This pattern is created when the price of an asset makes a sharp move upwards and then consolidates, forming a small symmetrical triangle. The bearish pennant is a continuation pattern, which means that it is typically seen as a bearish sign and indicates that the asset’s price is likely to continue falling.
To form a bearish pennant, the asset’s price will typically make a series of lower highs and higher lows, as it consolidates within the converging support and resistance levels. The pattern is typically completed when the price breaks through the support level, at which point it is likely to continue falling as traders enter into short positions.
One of the key characteristics of the bearish pennant is that the trading volume tends to decrease as the pattern progresses. This is because the price is consolidating within a small range and there is less activity from traders. However, once the price does break through the support level, trading volume tends to increase as traders enter into short positions and push the price lower.
In order to trade the bearish pennant pattern, traders should look for the following characteristics:
- A downward sloping resistance level: This is a level at which the asset’s price has consistently struggled to break through in the past.
- A converging support level: This is a trendline that connects the series of higher lows and slopes upwards towards the resistance level.
- Decreasing trading volume: As the pattern progresses and the price consolidates within the converging support and resistance levels, trading volume should decrease.
- A breakout: Once the price breaks through the support level, traders should enter into short positions and expect the price to continue falling.
It is important to note that the bearish pennant is a bearish pattern, but it is not a guarantee that the asset’s price will fall. As with any trading strategy, it is important to use risk management techniques and to always be aware of the potential for losses.
