Turning Pennants into Profits

Hey there! My name is Nate Thomas and I write for WOLF Financial. If you enjoy learning about trading you might also enjoy my newsletter, A Trader’s Education, and more of my content on X @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

Before we get into the charts, this week I want to make sure you’re aware of a simple way to get trade ideas to your inbox for free.

It is really simple.

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Last week we looked at the Gap Fill Strategy and DKNG gave plenty of examples of how it works.

This week we’ll dive into the Bullish Pennant Pattern and how to trade it.

I like examples so I brought you two for review before we shift over to a chart that has the same set up but has yet to break out.

First up is ServiceNow (NOW), which formed a bullish pennant over the past two months.

This pattern was followed by a nice break to the upside and a move from $560 to north of $600.

One of the keys to trading this pattern successfully is waiting for confirmation of the breakout. I typically wait for a second candle to close completely.

With NOW, there were two instances of a “fake break” where the first candle broke the pennant, but the next day quickly reversed.

On August 18th there was a dip lower only to be followed by a huge day back up and into the pennant.

A couple of days before the actual breakout, the candles moved up and out of the pennant but quickly reversed on day two.

The climb to $600 finally happened after two days of closing higher and out of the pennant formation.

Another example is with ORCL which had a huge move up (followed by a huge move down but that’s another topic).

Again, you see the pennant form by a big push higher and subsequent selling off.

The selling stage forms the upper angle of the pennant and is what you want to see break.

It is not always easy to spot both sides of the pennant but with a little practice they will become more obvious to you.

And when you do get the big moves, take profits! The sell off for ORCL happened only a couple of weeks after pushing from $113 to $127.

ORCL dropped all the way back below $110. If you don’t take profits before a sell off like this happens, you learn the hard way which is always expensive.

How to Trade a Bullish Pennant Pattern

When a pennant has been identified, your job is to take advantage of the set up and profit from the trade.

It is always that simple.

In a sense, you are looking at a down trend and uptrend at the same time and watching for which direction the break will go.

To recap:

1. The Break: Wait for the break of either the upper or lower band of the pennant, this is the start of the set up. Look for strong volume.

2. The Follow Through: Wait for the second candle to completely close and ensure it continues the direction of the break.

3. Take Profits: Patterns can get crowded, and trades can quickly reverse. Be the first to take profits not the last.

If you want to track a potential bullish pennant pattern trade, take a look at Vertex Pharmaceuticals (VRTX).

Similar to the prior two examples, the pennant formed over the past couple of months.

Unlike the examples given, the pennant for VRTX has not yet been broken. Although it is very close after Friday’s close!

The Bullish Pennant is a favorite and is just one of many patterns that can be identified to help put the odds in your favor for a successful trade.

Just like the Gap Fill strategy from last week, the key to utilizing these set ups is to keep things simple and remained disciplined. That’s it!

Have a great week of trading ahead!