Bearish Flag
Tue, Apr 15What is a bearish flag
A bearish flag is a bearish chart pattern characterized by two downward movements separated by a short period of consolidation and retracement.
The flagpole is created by a nearly vertical price drop driven by panic as buyers are caught off guard by sellers. This is followed by a bounce that forms parallel upper and lower trendlines, creating the flag shape.
The initial sell-off concludes with some profit-taking, resulting in a tight trading range that shows slightly higher lows and higher highs. This indicates that while selling pressure remains, some traders are entering long positions in anticipation of a reversal, causing the price to drift upward.
During the consolidation phase, traders should be ready to act if the price breaks below the lower range level or sets a new low, as this would signal that bears are regaining control and could trigger another sell-off.
When the lower trendline is breached, it can incite panic selling as the downtrend resumes, leading to another downward movement.
The effectiveness of a bearish flag can be heightened following a significant downward move due to the potential for increased overhead resistance.
Bearish flags may be more potent when the swing low that initiates the pattern is also an all-time low, as this suggests a possible absence of underlying support.
Conversely, a bullish flag is essentially an inverted version of a bearish flag, maintaining a similar structure.
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