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The Falling Pennant (or Bearish Pennant) pattern looks like a pennant turned upside down (the mast points up). It forms when falling prices experience a consolidation period, and the price moves within a narrow range defined by the converging lines through points (2, 4) and (3, 5). After the consolidation, the previous trend resumes.
This type of formation happens when anticipation of downtrend is high, and when the price of a security consolidates during a declining trend. It may indicate growing investor concern of an impending downtrend.
If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling the security short or buying a put option at the downward breakout price level. The breakout price level for the Falling Pennant pattern is the last point touching the bottom pattern line (point 4). To identify an exit, calculate the pattern height which is the initial fall between points 1 and 2. Then, subtract the pattern height from the breakout price. When trading, wait for the confirmation move, which is when the price falls below the breakout level.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.
