Bear Flag (Bearish Continuation)
Introduction | Main Characteristics | Example |
Flags are amongst the most commonly witnessed continuation patterns. A flag is similar to a pennant and represents a brief pause in a vigorous trend. These patterns typically form exactly in the middle of a rising or declining trend and, as such, are said to "fly at half-mast".
The formation of a Flag typically takes 1-12 weeks, although most chartists prefer formation over a period of 1-4 weeks, and not much longer. The parallel trend lines that comprise a flag tend to slant away from the prevailing trend and the pattern as a whole appears in the shape of a parallelogram or rectangle.
Legitimate flags are always continuation patterns and only rarely does a pattern that resembles a flag instigate a trend reversal. In order to avoid the pitfalls of wrongly picking a pattern as a flag, one must adhere to the guideline that a sharp move into the pattern is essential to its legitimacy. A lethargic preceding move would suggest that the pattern is not to be recognized as a flag.
Flags form during rising trends (Bull Flags) as well as during declining trends (Bear Flags). The action that precedes a bear flag is typically characterized by a sharp, virtually cascading move that is often accompanied by heavy trading volume. The near-vertical price drop into the flag pattern is referred to as its flagpole.
The occurrence of the flag provides a temporary respite from the bout of selling and is depictive of a period within which the trend is "catching its breath" and building vigor for the next phase. The trading activity witnessed during development of a flag is usually characterized by tepidness, that is until the pattern is complete.
In the case of the bear flag, a breakout below the lower flag line completes the pattern and triggers a resumption in the downtrend. This breakout typically brings with it a flood of activity as price careens towards the target.
The measurement of the target for a flag is rather straight-forward. The trader measures the length of the flagpole - the distance from the point at which the descent into the flag began up to the low point of the flag - and projects that arithmetic distance (a percentage measurement is often implemented in the case of a bear flag) from the breakout point to arrive at a target. The target is usually accomplished fairly quickly.
ANN was trading sideways (at 42) for a few weeks in October, before spiking, putting in a blowoff top at 45 and initiating a sharp decline on increased volume late that month. The stock dropped from 45 to 38.3 pretty quickly, before finding support and starting a minor counter-trend move.
This phase of consolidation only allowed the stock to retrace around 33% ($2.2) of its preceding decline and only lasted around two weeks. Notice the upward-slanting trendlines that bounded price during this phase.
Trading activity was low during the formation of the pattern and then suddenly surged once again as price pierced through the lower line (at 39.05), thus completing the bear flag and allowing the stock to continue its downtrend. Although the last point or two in the decline took a little longer to be accomplished than the first five, the target was reached within a month of the breakout.
The target (32.35) was calculated by measuring the length of the flagpole (45.0-38.3 = 6.7 pts) and projecting that distance from the level of the bearish breakout (39.05). In this instance an arithmetic measurement of the flagpole was used.
An alternate method that is especially useful during downtrends is to use a percentage measurement. This is accomplished by calculating the percentage decline accomplished by the flagpole (6.7/45.0 = 14.9%) and projecting a decline of that magnitude (39.05*14.9% = 5.8 pts) from the breakout point (39.05-5.8) to arrive at an alternate target of 33.25.
