Bearish Flag

Bearish Flag

Definition:

A bearish flag forms in the context of a bearish trend. The inverted flagpole of the pattern is formed when a stock stages a sharp downward move in a short period of time. Like the bullish flag, there are two types of bearish flags. One type has horizontal support and resistance. The other type of bearish flag has upward sloping support and resistance levels.

Bearish flags with precise horizontal support and resistance levels are rare, but generally strong indications that the bearish trend will continue. These types of bearish flags usually require a long time horizon to unfold.

Trader Tip

Bearish flags with upward sloping support and resistance are common. These bearish flags occur regularly within the context of a bearish trend. Bearish flags with upward sloping support and resistance tend to be shorter-term and very actionable.

Nuance:

Bearish flags with horizontal support and resistance are rare. When they do form, they are typically long-term in nature and driven by a significant news event or other fundamental development.

Bearish flags with upward sloping support and resistance are common. These bearish flags are relatively easier to trade because action points are precise.

Rarely will you see a either type of bearish form over the course of years.

Application:

A bearish flag is confirmed once the stock closes below the lower-end of the flag, whether the flag is horizontal or upward sloping. A stock might initially breakdown from a bearish flag, below support, but then retest previous support before ultimately trending lower.

A bearish flag is rejected if the stock breaks out and above the upper-end of the flag. This rejection of the bearish flag may mark the beginning of a short-term bullish trend.

Example:

Shares of Group 1 Automotive (GPI) traced a bearish flag in above figure with horizontal support and resistance. Notice how the stock traded sideways, between $39 and $43 for several months after a sharp drop. The stock took its time consolidating such a steep drop before ultimately continuing lower.

Observe how previous support at the lower-end of the bearish flag at $39 served as resistance after the stock broke down. In fact, there were two separate occasions when GPI traded up to $39 and subsequently rolled over, after it broke down from the bearish flag.

Example:

The bearish flag with upward sloping support and resistance is show in shares of Brunswick (BC) in above figure. The stock steadily trended lower for several months before staging a short-term rebound, during which it formed a bullish channel. In the context of the overall bearish trend, the short-term bullish channel helped to define the bearish flag.

The stock broke down in a decisive way from the bearish flag, offering a precise entry point into new bearish positions. Following the breakdown from the bearish flag at $23, BC continued lower over the next several months, falling as low as $17.