hi guys, I've recently read Martin Pring's book on Price Pattern. Anyways, I was following Tesla earlier today on my paper trading account. Can someone explain to me why the first two Pennants are breaking upward and not downward? and the third pennant, I was kind of expecting a continuation based on the two prior breakouts but it ended up breaking out to the downside. Any insight?
I think that what you are seeing is an important lesson. Sometimes the trade works, and sometimes it doesn't. The first one is rather large, while the 2nd and 3rd are much smaller, so these may be fundamentally somewhat different enough to different traders trading different time frames. But you have correctly noticed a certain phenomenon. In the first two cases, the level of support that was forming continued to be support, since price couldn't break through, and the diagonal down slopping trendline of the pennant that tracked the lower highs broke. Obviously as the pennant forms, either the support level will break, and price goes down, or the down trendline will break as price busts through. What jumps out for me right away though was if you look at the highs around 239, you've got 3 tops, hence a triple top. So in my opinion, it wasn't so much about the 3rd pennant that worked and price broke out the bottom, what is more important is that the high around 239 couldn't be taken out, so going down was the logical new direction. The fact that the pennant broke this time is inconsequential. So I think that if you are studying pennants, you will see that some work, and some don't, but if you try and find what is different about them, the context, this will make a huge difference. The next trick of course is figuring out where you want to be a buyer or a seller.
Thanks for that bit of insight. I didn't notice the triple top until you mentioned it. What you say makes complete sense in regards to the last pennant being irrelevant since it kept on finding resistance around 239.
You can also say that there is an upside down pennant with the horizontal line being resistance and the upslopping trendline breaking. Likewise, I also see a sort of pennant within your big pennant. Both I've drawn here in white. I think there is nothing wrong with trading patterns, but pretty soon, you start to see them everywhere, so the trick is really figuring out what they all mean. When it comes to technical analysis, everything works some of the time, and nothing works all the time, so you have to figure out how to use what you're using and when to use it and when not to use it.
The Pennant is a relative of the Flag pattern. They are very short term reactions to a move in an advance/decline. The advance/decline leading to the pattern is usually big and/or fast, which creates what is often seen as a pole. These patterns do not/can not form within consolidations. The price movement in your chart is bound between the high and low of the 4 bars between 8:30 and 8:45. The attached chart is one I just picked out from a Google search. I think you'll see the difference. I can imagine that in your eagerness to learn you chose the TSLA chart as you had an interest in it and went ahead to analyse the PM. The result was that you saw what wasn't there. I believe that this is a common pitfall for both new and old users of TA. So you should achieve better results if rather than analyzing a certain chart, go through many charts until you find a clear TA indication that stands out like something coming at you from a 3D movie screen. It you force the situation or bend the lines to make a pattern, the result will be like drawing tits on a blackboard.