Reliance Industries Ltd. (RIL)
Reliance Industries has been forming a pennant pattern on the charts over the last few weeks.
What is a Pennant Pattern?
Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.
Pennants are really short-term triangles. They form with lower highs and higher lows, over one to five weeks. The line through the peaks and the line through the troughs converge and the pattern is completed by a break outside the converging lines.
In the formation of a Pennant, there are two trendlines to draw. The upper trendline, which is referred to as the supply line, represents resistance. The supply line represents a lack of conviction by the buyers to commit more funds to the market in a particular issue, and because of that, there is enough profit-taking and short selling to turn prices back down. The lower trendline is the demand line and represents support. In this situation, it is the buyers that come back to the party and drive the prices northward one more time.
Volume Confirmation
Volume normally expands at the start of the flag or pennant, contracts as the pattern develops and then expands on the breakout.
Target Measurement
In an up-trend, the targeted move is measured from the start point of the trend (the breakout point at the base of the trend or most recent congestion pattern) to the highest high recorded in the flag or pennant pattern. The move is then projected up from the point of breakout (from the flag or pennant pattern), to arrive at the target.
In a down-trend, the targeted move is measured from the start of the down-trend (the breakout point from the reversal or most recent congestion pattern). The distance is calculated to the lowest low recorded in the flag or pennant pattern and then projected down from the point of breakout (from the flag or pennant pattern).
How to trade Pennants
There are two schools of thought:
(A) The first school will enter a trade at the point of breakout and place a stop-loss one tick outside the opposite trendline.
In an up-trend, the trade is entered on a break above the upper flag or pennant line. The stop is placed just below the lower flag or pennant line, in line (vertically) with the point of breakout.
In a down-trend, the trade is entered on a break below the lower flag or pennant line, with a stop placed one tick above the upper flag or pennant line, opposite the breakout point.
(B) The second school will enter a trade before the breakout point, while the pattern is still forming. Their reasoning is that the patterns are normally reliable and early entry means lower risk, as the stop is closer to the entry point. This is only makes sense for pennants, not for flags where there is no technically reliable point to place a stop-loss.
For pennants, place a stop-loss just outside the trendline, in line (vertically) with the point of entry, on the opposite side to the expected breakout.
Example with Reliance Industries Ltd.
In the case of Reliance the resistant or supply level is at Rs. 460.00. A break above this level would mean that the current bearish trend has reversed and a new bullish trend has started. A break above the level of Rs. 460.00 would give us an initial target of Rs. 490.00 to 500.00.
A break below the support or demand level of Rs. 420.00 would mean that the bearish trend has resumed or continued and would give us a target level of Rs. 380.00 to 390.00.
I would suggest traders to wait for a confirmation which would be a breaking its support or resistant levels and going short or long accordingly.
To view the attached chart please click on the thumbnail below.
If you have any questions or comments please post them here.
Reliance Industries has been forming a pennant pattern on the charts over the last few weeks.
What is a Pennant Pattern?
Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.
Pennants are really short-term triangles. They form with lower highs and higher lows, over one to five weeks. The line through the peaks and the line through the troughs converge and the pattern is completed by a break outside the converging lines.
In the formation of a Pennant, there are two trendlines to draw. The upper trendline, which is referred to as the supply line, represents resistance. The supply line represents a lack of conviction by the buyers to commit more funds to the market in a particular issue, and because of that, there is enough profit-taking and short selling to turn prices back down. The lower trendline is the demand line and represents support. In this situation, it is the buyers that come back to the party and drive the prices northward one more time.
Volume Confirmation
Volume normally expands at the start of the flag or pennant, contracts as the pattern develops and then expands on the breakout.
Target Measurement
In an up-trend, the targeted move is measured from the start point of the trend (the breakout point at the base of the trend or most recent congestion pattern) to the highest high recorded in the flag or pennant pattern. The move is then projected up from the point of breakout (from the flag or pennant pattern), to arrive at the target.
In a down-trend, the targeted move is measured from the start of the down-trend (the breakout point from the reversal or most recent congestion pattern). The distance is calculated to the lowest low recorded in the flag or pennant pattern and then projected down from the point of breakout (from the flag or pennant pattern).
How to trade Pennants
There are two schools of thought:
(A) The first school will enter a trade at the point of breakout and place a stop-loss one tick outside the opposite trendline.
In an up-trend, the trade is entered on a break above the upper flag or pennant line. The stop is placed just below the lower flag or pennant line, in line (vertically) with the point of breakout.
In a down-trend, the trade is entered on a break below the lower flag or pennant line, with a stop placed one tick above the upper flag or pennant line, opposite the breakout point.
(B) The second school will enter a trade before the breakout point, while the pattern is still forming. Their reasoning is that the patterns are normally reliable and early entry means lower risk, as the stop is closer to the entry point. This is only makes sense for pennants, not for flags where there is no technically reliable point to place a stop-loss.
For pennants, place a stop-loss just outside the trendline, in line (vertically) with the point of entry, on the opposite side to the expected breakout.
Example with Reliance Industries Ltd.
In the case of Reliance the resistant or supply level is at Rs. 460.00. A break above this level would mean that the current bearish trend has reversed and a new bullish trend has started. A break above the level of Rs. 460.00 would give us an initial target of Rs. 490.00 to 500.00.
A break below the support or demand level of Rs. 420.00 would mean that the bearish trend has resumed or continued and would give us a target level of Rs. 380.00 to 390.00.
I would suggest traders to wait for a confirmation which would be a breaking its support or resistant levels and going short or long accordingly.
To view the attached chart please click on the thumbnail below.
If you have any questions or comments please post them here.
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