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Technical Analysis of Stock Trends
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Bearish
Pennants
Technically speaking, a bearish pennant is a sharp, strong volume
decline on a negative fundamental development, several days of
narrowing price consolidation on much weaker volume followed by a
second, sharp decline to new lows on strong volume.
Why Does It Happen?
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
How are Technical Targets
Derived?
The technical target for a bearish
pennant
pattern is derived by subtracting
the height flag pole from the eventual breakout level at point (e).
Bearish Pennant for
Pulte Corp.
Vital Signs
-
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 a
symmetrical 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 of the breakout level. If the stock
closes above this level (now resistance) for any reason the
pattern becomes invalid.
bear
flags 
rising
wedge
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