What is a pennant formation?
A pennant is a technical continuation pattern that often develops after a strong, directional price move.
The initial surge is sometimes called the flagpole. After that sharp move, the market pauses as buyers and sellers battle for control. The price begins making lower highs and higher lows, creating two converging trendlines that resemble a small pennant.
That contraction signals that the market is building energy. Neither side has taken firm control during the consolidation, but as the two trendlines move closer together, there is less room for the price to maneuver. Eventually, something has to give.
Pennants frequently resolve in the direction of the original move. However, traders should not assume the continuation will occur. The breakout—and the ability to stay outside the pattern—is what confirms the next directional move.
USDJPY’s bullish flagpole
Looking at the hourly chart, USDJPY’s flagpole began near the September low around 152.93. From there, the price moved sharply higher and eventually reached the 158.04 area.
That was a gain of more than 500 pips and clearly established the initial bullish momentum.
After reaching that high, the pair corrected toward 156.65 before rebounding. Since then, the price has been making a series of lower highs and higher lows. Those converging levels have created the pennant formation shown on the chart.
The consolidation is therefore taking place after a strong move higher. That gives the pattern a bullish bias, but buyers still have work to do.
What would confirm the bullish continuation?
For buyers to regain firmer control, the price needs to break above the pennant’s descending upper trendline. That resistance is currently near the 157.53–157.70 area, although the precise trendline level will gradually move lower over time.
A break is only the first step. Traders will also want to see the price remain above the trendline. A quick move above followed by a reversal back inside the pennant would raise the risk of a false breakout.
If buyers can break and stay above the upper boundary, the next targets would include:
- 157.90–158.04: The recent high and an important swing-resistance area
- 158.419: The 200 day MA
- 158.55: The 38.2% retracement of the larger decline
- 159.58: The 100-day moving average
Moving above 158.04 would be particularly important because it would take the price above the top of the flagpole and confirm that buyers are extending the broader rally.
What would weaken the pattern?
The bullish interpretation would be weakened if USDJPY breaks below the rising lower trendline of the pennant.
The first downside area to watch is around 156.92, followed by the stronger support clustered near:
- 156.77: Rising 100-hour moving average
- 156.65: 50% retracement and the recent corrective low
- 155.77: 38.2% retracement and near the rising 200 hour MA at 155.63 currently
- 155.04–155.21: Lower support swing area
The 156.65–156.77 area is especially important. It combines the rising 100-hour moving average, the 50% retracement and the lower part of the recent consolidation. A sustained move below that cluster would suggest the pennant has failed and that sellers are taking back more control.
The trading lesson
A pennant gives traders a visual representation of a market that is compressing after a strong move. The pattern identifies where the next battle is likely to be decided, but it does not guarantee the outcome.
For USDJPY, the earlier rally gives buyers the advantage. A break above the upper trendline would open the door for another run toward 158.04, followed by 158.55. Conversely, a break below the lower trendline—and especially below 156.65–156.77—would tell traders that the expected bullish continuation is not developing.
The price is approaching the point of the pennant. Look for the break, then look for the market to stay outside the pattern. That confirmation will help determine whether buyers restart the trend or whether sellers turn the consolidation into a deeper correction.
This article was written by Greg Michalowski at investinglive.com.