Bear flag pattern

A bear flag is a short consolidation after a sharp decline. Sellers push price down quickly, some of them take profit, and price lifts a little while buyers fail to take control. When the flag breaks to the downside, the earlier decline is read as resuming.

It is the mirror image of the bull flag pattern: the pole points down and the flag tilts up.

• Flagpole – a steep fall over a few candles, larger than the moves before it and usually on high volume.
• Flag – a narrow channel of small candles that slopes up, against the trend. Its highs and lows fit between two parallel lines. A flag can also run sideways.
• Breakdown – a candle that closes below the lower line of the flag.
• Target – the length of the flagpole subtracted from the breakdown level.

• Start from the pole. Without a fast, clear decline the pattern is an ordinary bounce.
• The flag is small compared with the pole. As a rule of thumb traders want it to recover less than half of the pole.
• The flag is short. On a daily chart it usually lasts from a few days to about three weeks.
• Volume fades while price drifts up. A bounce on weak volume shows that buyers are not committed.
• Draw the flag with the channel tool or two trend lines through its highs and its lows. Replay on Charts then steps forward candle by candle and shows where the breakdown and the stop would have been.

• Entry – a short on a close below the lower line of the flag. A more conservative entry waits for a move below the bottom of the flagpole.
• Stop – above the high of the flag. If price returns into the channel and breaks its high, the pattern has failed.
• Target – measure the flagpole and subtract it from the breakdown price. A fall from 148 to 116 is a pole of 32 points; a break near 122 gives a measured target of 90. It is an estimate, not a level price has to reach.
• Position size – set it from the distance between the entry and the stop.

• Bear flag – forms in a downtrend. The pole points down, the flag slopes up, the break is to the downside.
• Bull flag – forms in an uptrend. The pole points up, the flag slopes down, the breakout is to the upside.
• In both, the flag moves against the pole, and the pole length gives the target.
• A bear pennant is the same pattern with converging lines: a small triangle instead of a channel. It is traded in the same way.

Every bounce in a downtrend looks like a possible bottom. A few signs separate a flag from the start of a reversal:

• Depth – a flag stays in the lower half of the pole. A bounce that recovers most of the pole is no longer a flag.
• Speed – a flag drifts. A sharp rally with large candles shows real buying.
• Volume – rising volume on the way up argues against a flag.
• Structure – a close above the high of the flag, and then above the last lower high of the downtrend, changes the market structure.

• Shorting inside the flag – until price closes below the lower line, the bounce can keep going.
• Shorting into support – a flag directly above strong support on a higher timeframe has little room to fall.
• Chasing a late entry – after a long breakdown candle the stop is far away and the trade no longer pays for its risk.
• Trading the third or fourth flag in a row as if it were the first – late in a decline sellers are tired and sharp rebounds are common.
• Forgetting the stop – a failed bear flag often turns into a fast rally as short sellers close their positions.