Bear flag
| Bear flag |
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A Bear Flag is one of the chart patterns in the stock market. It is a clear, strong decline in volume in the case of negative fundamental development, several days of deviation from higher share prices in a much weaker volume, followed by a second, sharp decline to new minima in a strong volume. The technical objective of the Bear Flag pattern comes from subtracting the height of the flag pole from the possible level of break-out at the point[1]. A bear flag appears when a trend is dominant. We therefore hope that time will fall and break short term flag support. However, our trading has become active. Short-term support can be either the lowest trend point or the lower trend line[2].
Flag designs and consolidations
Flag patterns are among the most powerful chart patterns in the stock market world. Not only do they provide a good signal, but, more importantly, they give us the opportunity to construct a simple and effective trading plan. This combination makes them so powerful. Flags can be further distinguished by pennants, triangles and wedges. For our purposes, let's call them all flags or strict consolidations. The point is that we only trade them when they break out of their strict consolidation towards the dominant trend[3].
Ideal Bear Flag
With the Bear Flags we want the consolidation to be either sideways or slightly drifting upwards in relation to the main trend. This gives us a support area that we can use to define our short entry point. If the consolidation drifts down in line with the main trend, it is impossible to define an entry point based on a support interruption. It is therefore essential to consolidate sideways or slightly in the direction of the dominant trend[4].
Difference between Bull Flag and Bear Flag
Typically, a Bull Flag is formed when the price falls and forms the shape of a standing cup as shown at the bottom of the chart below, and the three flags where they are shown above the fixed price action in the bearish The Hague pattern are practically mirrored against the Bull Flag pattern in the way it is generated. The bull's pattern is very similar to that of a cup standing upside down on the right, while the Bear Flag has the upside down pattern of a cup. The cup-shaped pattern at the bottom of the graph is the Bull Flag pattern. Both of these patterns because they differ slightly in the way they are generated and are not always as clear as shown here[5].
Examples of Bear flag
- A classic bear flag is when there is a strong and sudden selloff in a stock price, followed by a period of consolidation where the stock fluctuates sideways in a range, known as the “flag”. This period of consolidation typically lasts for several weeks or months, and ultimately leads to a downside breakout and a continuation of the downtrend. A key characteristic of a bear flag is the decrease in volume during the flag portion of the pattern, which signals that the buyers have lost interest and the sellers are in control.
- A bear flag can also be seen in the form of a descending triangle. This is when a stock makes lower highs and lower lows, forming a triangle shape with the lower highs and support line as the two sides of the triangle. Once the support line is broken, it is a sign that the bear trend is likely to continue.
- Another example of a bear flag is a head and shoulders pattern. This is when a stock makes a higher high, followed by a lower high, and then a lower low. The neckline connects the two lower highs and once this line is broken, it is a sign that the bear trend is likely to continue.
Advantages of Bear flag
The Bear Flag pattern can be a very useful trading tool as it can provide traders with an opportunity to capitalize on a short-term trend. The advantages of the Bear Flag pattern include:
- It provides traders with an opportunity to capitalize on a short-term trend.
- The Bear Flag pattern often signals a continuation of the trend and provides traders with an opportunity to enter a trade in the direction of the trend.
- The Bear Flag pattern can be used to identify potential entry and exit points for a trade.
- It is a reliable pattern and can be used to identify potential reversals in the trend.
- The pattern can be used to identify potential support and resistance levels and can be used to identify potential targets for a trade.
Limitations of Bear flag
The limitations of the Bear Flag pattern are as follows:
- The pattern is subject to false signals, meaning that the trend can continue to go downward even after the Bear Flag has formed.
- The pattern may not be visible to the untrained eye, as the volume needs to be taken into account to identify it.
- It is difficult to estimate the exact point at which the downward trend will end, making it difficult to determine when to exit the trade.
- It is difficult to determine whether the downward trend is a result of fundamental or technical factors.
- The pattern can be easily disrupted by news or other market events, making it difficult to predict the exact length of the trend.
- Technical analysis: Technical analysis is used to identify patterns in the price and volume movements of a security. In the case of a bear flag, technical analysts will look for a clear break in the price and volume movements, followed by a period of consolidation and then a second break down.
- Sentiment Analysis: Sentiment analysis is used to detect market sentiment in the form of opinions, news, and rumors. By studying sentiment, investors can gain insight into the drivers of a bear market and how sentiment affects the direction of the market.
- Fundamental Analysis: Fundamental analysis involves studying the financials and economic data of a company or industry to identify underlying value. Fundamental analysis can help investors identify bearish trends and determine the best entry and exit points.
- Risk Management: Bear markets can be risky and volatile, so it is important to develop a risk management plan before entering a bear market. This plan should include strategies such as diversification, stop-loss orders, and hedging to help minimize risk.
In summary, investors can use technical analysis, sentiment analysis, fundamental analysis, and risk management to identify bearish trends and develop strategies for trading in a bear market. By understanding the underlying drivers of a bear market, investors can potentially capitalize on bearish trends and capitalize on investment opportunities.
Footnotes
References
- Bruce M. Kamichi M. (2010) Chart Patterns, Bloomerg Press, New York
- Cohen G. (2012) The Insider Edge: How to Follow the Insiders for Windfall Profits, s. 33
- Flags and Pennants, (2019), s. 4
- Morales G. A. (2015) Short Selling with the O'Neil Disciples: Turn to the Dark Side of Trading, Wiley
- Tarr I. (2014) Stock Market Trading for Beginners, Authorhouse, Bloomington, USA
Author: Anna Syjud
