In a market forex or general trading chart, a bear pennant is a technical analysis pattern that can help you spot significant downtrends. Bearish pennant patterns are popular among cryptocurrency traders since they’re simple to spot and can alert you to long and deep corrections. As a result, you can use the pattern to spot false bottoms.
We’ll go through what a bear pennant pattern is, how to recognize it, and how to confirm with indicators in this article. Then we’ll review how a trader sets up their trade with risk and take-profit amounts mentioned. Finally, because the bear pennant pattern isn’t always perfect, we’ll go over some of its flaws.
What Is a Bear Pennant and What Does It Mean?
A bear pennant is a chart trading continuation pattern in which prices pause and consolidate temporarily after a big move lower before breaking down further and resuming the broader drop. The consolidation, which typically resembles a pennant as prices wedge together before falling further, gives the pattern its name. The bear pennant chart pattern is the polar opposite of the bull pennant. A bear pennant is formed when the price of a cryptocurrency drops dramatically, but buyers believe it is still too expensive.
The buyers are holding out and refusing to buy. Short traders feel scared and close their positions by buying back. As a result, the cryptocurrency price rises somewhat but on low volume. The volume during this consolidation period tends to be low over time. The cryptocurrency appears to be bouncing around aimlessly in a range, making little progress. The buybacks stop after a short amount of time, and the trading volume tends to diminish as the final traders are shaken out. When the volume declines, the sellers return to push the market lower, resuming the downtrend.
Technically, a bear pennant is very similar to a bear flag. Both patterns consolidate a downtrend before a price break is lower. Their shape differs slightly. During the consolidation phase, a bear flag has a rectangular look, whereas the bear pennant has a triangle look. Analysts disagree over which pattern is more powerful: the bear pennant or the bear flag.
On the one hand, the bear pennant’s triangular shape indicates few buyers in the market, which tends to shorter consolidation periods. The rectangular shape of the bear flag, on the other hand, is beneficial at “faking out” potential buyers, trapping them into selling as the downtrend profits momentum. The discussion will rage on, but make no mistake: both patterns indicate that big bearish downtrends are on the way.
How Does a Bear Pennant Appear?
A bear pennant has three distinct phases. The cryptocurrency market will undergo a massive, strong, and deep correction. Often, the correction appears to be unending, as if it would never end (point 1 in the below diagram). Then, the downtrend comes to an end, and a little rally begins. Unfortunately, the rally lacks the intensity and volume to last and shortly fades away. The rally has retraced fewer than a third of the decline and is still in the lower half of the first decline (point 2).
The short-term rally quickly fades way to another correction. The decline is as modest as the rally, and the cryptocurrency begins to trade in a sideways range. This sideways migration has one distinguishing feature: the upper and lower range boundaries become compressed with time. When trend lines are drawn along the consolidation’s outside edges, they converge to form the shape of a contracting triangle (point 3).
This triangle defines the pattern, leading to a strong lower continuation. Trading volume also contracts during consolidation. The battle between bulls and bears appears to be a truce: both sides stop showing up and hold their places as the consolidation continues. The bearish trade is set up when the pattern looks like a triangle on a stick.
The consolidation eventually leads to a breakthrough lower as the sellers return in force, just as they did in the initial decline (point 4). This is partly attributable to buyers who thought they were getting an effective deal and now have to sell in a depressed market. The seller-buyer imbalance is so high that prices quickly fall. It is high for the secondary downtrend to be as long as the primary downtrend if the consolidation represents the decline’s midpoint.
Bear Pennant Indicators to Confirm
The shape of a bear pennant, such as where it originates within the prior downturn, is the best indicator for confirming it. Various other indicators can use to confirm the bear pennant, but they aren’t always the most accurate. Instead of a rectangular shape, a correct bear pennant pattern should have a contracting triangle shape.
Shape and Location
The shape of the bear pennant must be a triangle at the bottom of a stick, as previously mentioned. This pattern’s triangle part must occur in the lower half of the stick, most likely in the lower third. The triangle’s duration will be short as the market prepares to unload in a deeper correction.
Volume
Volume can reveal a lot about the bear pennant pattern’s authenticity. The initial downturn is usually accompanied by a high amount of trade volume. It will diminish as both buyers and sellers stand back while the cryptocurrency consolidates during the triangle pennant section of the pattern. Volume tends to pick up again as the market corrects too far lower levels as the triangle completes. Remember, volume tends to trend. As a result, a consolidation on declining volume indicates that the advance is only transitory and will likely retrace.
Inadequate Range Expansion
Volatility tends to rise when a cryptocurrency is in a strong trend. Volatility can measure as a function of the high and low of each price period, referred to as a range. When the range widens, it suggests increased volatility and the probability of the cryptocurrency trend in a likely direction. When the narrows, it indicates there is likely to be consolidation with little net movement.
To assess if the range is increasing or decreasing, add the Average True Range (ATR) indicator with a one-period setting to the bottom of your charts. Increased volatility is shown by the subsequent line on the chart increasing. If the line is decreasing, it indicates that volatility is reducing.
How to Trade a Bear Pennant?
Identifying a bear pennant is one of the most arduous components of trading the pattern. The next trade can be profitable due to the ease of setup.
How to Recognize a Bear Pennant Pattern on a Crypto Chart?
ETH crested in May 2021 and began to fall. ETH dropped 25% in a week, to the low of May 16. The bear pennant pattern began with this steep correction. Refer to the chart below.
ETH then rebounded off the low, but only temporarily. The ETH rally retraced 38% of the May decline, putting it in the sell-lower off is half. Ethereum begins to bob around sideways, neither rising nor falling.
This sideways chop occurs when volume shrinks. Candlestick ranges shrink. The pattern’s outer trend lines also contract. This setup is suitable for a bear pennant trade.
Opening a Short Sell Position
It’s time to arrange the trade’s entry after detecting the pattern. The lowest point of the pattern is the simple entry point. If the market falls to new lows, place an entry order to sell short. You may confirm that ETH is ready to trade to lower levels by placing an entry at the pattern’s low point. If it occurs, expect a lower-than-expected explosion, followed by another high downtrend.
Putting a Stop Loss in Place
The stop loss will be put near the recent highs, above the pattern. The optimal area to place a stop loss is right above the pattern’s resistance trend line. If ETH does rally over the resistance line, the bear pennant pattern will be invalid, indicating that another pattern is developing.
Knowing When and Where to Profit
On many times, the bear pennant is nearing the point of its decline. Simply measure the first fall and project it near the last contact of the resistance trend line at the end of the bear pennant. The Fibonacci extension tool comes in helpful in circumstances like this to help you measure things out. This suggests a take-profit objective near $2,300 for ETH in the chart above. In fact, ETH fell severely a few days later, reaching a low of $1,850.
Triangle Patterns vs. Pennant Patterns: What’s the Difference?
What’s the difference between bullish and bearish pennant patterns and triangle patterns? They appear to be very similar at first glance, and they overlap in many places. During the consolidation phase, the pennant pattern includes a triangle-like shape. The crucial difference is what happens before and after the triangle, such as how long the triangle lasts.
There is a strong correction leading up to the bearish pennant pattern. The pattern then crystallizes into a triangle configuration. However, with a regular triangle pattern, a strong trending move does not require, precede the triangle. Second, once the triangle in a pennant pattern forms, it’s easy to indicate which direction the pennant will break. A regular triangle’s breakout might occur either to the upside or to the downside.
The third significant distinction between a pennant and a triangle pattern is the length of time they last. A pennant’s triangle section is usually shorter than a regular triangle pattern. The pennant’s triangle quickly forms since the correction’s emotions are strong, and traders aren’t buying into the downtrend’s consolidation en masse. A regular triangle pattern can endure for years and be preceded by minor trends.
The Bear Pennant Pattern’s Limitations
With an acceptable risk-to-reward ratio trade, an effective pennant can alert you to a strong trend. Not all emerging pennants, however, are 100% accurate. If the triangle consolidation phase lasts too long, the chances of a continuation are reduced. This enhances the chances of a complete reversal, which can frustrate bearish traders.
Waiting for a collapse below the triangle’s lows, rather than trying to time a short sell entry at the triangle’s high, is one method to prevent frustration. Another drawback of the bear pennant pattern is that the data from other confirming indicators may be skewed if you follow it on a minute chart. The volume or ATR indicator does not have enough data to provide clear signals. As a result, even if the pattern eventually plays out, a smaller chart period may not provide confirmation of it.
Final Thoughts
The bear pennant pattern is a simple to recognize and trade pattern. The pattern’s structure and the indicators that confirm it are simple to follow. The succeeding trades, once identified, can provide good risk-to-reward ratio chances. The bear pennant pattern is a favorite among crypto traders because of its simplicity. In a bearish pennant pattern, one can enter a trade only after the price has broken down and the consolidation phase has ended. The traded volumes should be higher than the consolidation phase volumes. One has a decent probability of making money if the pattern is correctly spotted and the trade is started at the right time. Online screeners, which are used to select stocks based on significant criteria, should be employed by traders. They send out automatic alerts whenever a trading opportunity in the stock market arises.