Love Those Pennants
Basic charting patterns – we have all used them, in particular early on when we got started. They offer gentle comfort and an easy to grasp paradigm introducing order into what previously appeared to be nothing but random noise or chaos. I personally am not a strong proponent of charting patterns and only use them in strict moderation. And when I do I actually apply them a bit differently – or call it a bit more deviously. One of the main reasons is that it seems to me that the weakest aspect of charting patterns are the rules defining their final resolution:
The generally accepted notion is that a pennant is a continuation pattern. However if you follow that link you will see that the odds are tantamount to a coin toss, so why use them in the first place? Actually they can be very useful if you think outside the box (or flag in this case). See, I really don’t worry about the direction – that’s for the suckers on the other side of my trades. What I care about is the breach of the pennant’s boundaries. A very recent (and profitable) example was Silver for instance:
As you can see this little gem was coiling up, even painted some dojis, and I am sure many PM bears were salivating to see a continuation of the previous plunge. If you were a Gold subscriber you would however have taken whatever candle breached that boundary and it just so happened to the long side. Ergo – my subs banked some mighty coin and the rest of you got to chase it.
Why do I trade this way? Because one big lesson I finally learned (after paying a hefty price over and over again) is that direction means nothing and that resistance/support is everything. And those latter two just so happen to change on a daily basis and can also easily be manipulated by large institutional players.
So what was supposed to go down suddenly goes up, which exactly ties into Scott’s prime directive which is that if something is supposed to happen and it doesn’t then the odds support that the exact inverse will happen and most likely with some vehemence.
I have another example of a ‘failed’ pennant that seems to be repeating Silver’s very move right now. Fortnately it’s not too late to take an entry:
Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
That’s right – crude not only breached its own pennant’s upper boundary – it also looks like it’s going to close above its NLBL today – which technically expired yesterday per Chris Carolan’s rules. There are no guarantees but a long position here seems to have decent odds. A nervous stop would be at below today’s lows – a more conservative one a few ticks below the pennant’s lower border (at which I would actually consider it a failed break out and would reverse positions).