Bear FlagBy on 2011 Nov 20 Sun 19:52:26
Part of Art of Chart Reading
Bear flag is one of the most common price patterns appearing in charts of all timeframes. Bear flag is a continuation pattern in a downtrend. It is useful to identify the pattern early in its development so that in case it is mistaken as a bottom you can still bail out before the downtrend resumes.
Following chart shows 2 bear flags and how the market unfolded after the bear flags are broken to the downside.
Bear flags in general produces a measured move if the market is not very close to an important support price level. In the chart above, the down move at the left hand side (highlighted in red) went into a consolidation phase (as marked by the blue lines). The consolidation keeps trying to push higher yet failed to push a lot higher. This kind of consolidation after a down swing is called Bear Flag. At the end of the bear flag I am talking about, notice a lower higher was formed and then the price just broke down to a lower price level. The red line in the middle of the chart shows where the measured move target would be and that the market reached that price target before moving back up again.
There is a smaller bear flag highlighted in green and the related measured move is marked in orange. Sometimes markets do move in well structured ways like this example chart.
Fading the spike high or rally in a bear flag is not a good idea because you may have mistaken a rounding bottom or a flattened inverse head and shoulder as a bear flag. The best way to engage a bear flag is to sell the break of the support line underneath the bear flag. This gives you controlled risk, higher probability of success, and risk/reward ratio you deem acceptable based on the projected target price level.