5# Bearish Pennant (Continuation Pattern)

• Bearish pennant formations involve two distinct parts, a near vertical, high volume flag pole and a symmetrical, low volume triangular consolidation comprised of four points and a downside breakout.

• The triangular consolidation during the formation of the pennant is very much like asymmetrical

triangle and this implies that traders feel comfortable with the current price.

• The actual flag formation of a bearish pennant pattern must be less than 20 trading sessions in

duration.

• Most bearish pennant patterns occur at the middle of the larger move lower for a stock.

• Downside breakouts often lead to small 2-3% declines followed by an immediate test ofthe breakout

level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Bearish pennants are very close cousins to bear 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 bearish pennant pattern is often called the flagpole or mast. During this phase the stock price collapses to a reaction low (a) following some negative fundamental development. Very often this will be downward guidance, an unfavorable legal resolution or negative earnings surprise but the change in price is near vertical as would be buyers are overwhelmed by frantic new sellers caught-up in the euphoria of the moment. As the stock collapses some speculators that were smart enough to have sold short stock at higher levels begin buying to cover short positions and some less informed investors actually begin bargain-hunting.

At this point the second phase or pennant portion of the bearish pennant begins. Because the flow of news and investor sentiment is overwhelming negative, most of the stock bought by speculators is easily absorbed by nervous sellers in the beginning but as time passes selling pressures abate and slowly, the stock price begins to rise on dramatically reduced volume. It is bargain-hunting that pushes the stock off the lows but volume is so weak that the rally soon fizzles and the stock puts-in a short term top point (b).

With bearish sentiment still rampant the next decline threatens to push the stock to fresh new lows but as the decline begins volume slows further and the bargain-hunters become more enthusiastic. As the stock approaches the reaction low price stabilizes and second short term bottom is established at slightly higher levels point (c). Buoyed by the fact the stock did not make a relative new low bargain hunters once again begin buying the stock. This time the stock rallies but fails to move beyond the highs established at point (b).

This lower high establishes the parameters of a very small symmetrical triangle pattern and becomes point(d) in the bearish pennant pattern. During the next 3-4 sessions the stock trades in a narrow range and volume slows dramatically before the beginning to slide toward the lows established at point (c). Over the next 1-2 sessions the stock moves through these lows, triggering a downside breakout (e). The next session several Wall Street firms make negative comments or reduce earnings estimates and a new leg lower begins. The stock opens lower and goes on to make significant new lows in the weeks ahead.