Dissecting that definition one piece at a time, let's compare it to the current chart of the S&P 500:
- Follows a steep, or nearly vertical fall in price - check
- Consists of two converging trendlines that form a narrow, tapering flag shape - check
- The pennant shape generally appears as a horizontal shape, rather than one with a downtrend or uptrend - check
Moving forward under the assumption that we're in the middle of a bearish pennant, what does that portend for future price action?
Fortunately, technical analysis provides a good rule of thumb for forecasting price movements. Known as the "measured move," one can calculate the termination point of a chart formation by doing some simple math. First, take the highest price of the consolidation pattern and subtract the lowest price. In this case, the high was about 1,993 on August 28 and the low was 1,867 on August 24 with the difference being 126. This gives you the total range of price within the pennant. The next step is to subtract the total range, 126, from the low of the pennant and the resulting value is your measured move. So, 1,867 - 126 = 1,741. [The same logic can be applied to a bullish pennant but only in reverse. Rather than subtract the total range from the low, you add it to the high.]
If you're in agreement with the logic above, then you should expect a 10% or more drop in the S&P as soon as it breaks below that lower green trendline I've drawn on the graph. The price target of 1,741 also just happens to correspond to the intermediate lows from February 2014 which further validates my price target.
Remember, this is all based on daily fluctuations and it does not take into account longer-term trends. In other words, I'm not saying that a fall to 1,741 will be the ultimate bottom of the current correction. What I am saying is that if the S&P does drop to this level, then it will mark the completion of the bear pennant. Further declines from there are certainly possible and, as I've argued previously, even likely.