Psychology and description of bear flag and bull flag

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What is a Flag Pattern?

A Flag pattern is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole. A “Flag” is composed of an explosive strong price move that forms the Flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the Flag. When the trend line resistance on the Flag breaks, it triggers the next leg of the trend move and the stock proceeds ahead. What separates the flag from a typical breakout or breakdown is the pole formation representing almost a vertical and parabolic initial price move. Flag patterns can be bullish or bearish.

Bullish Flag:
his pattern starts with a strong almost vertical price spike that takes the short-sellers completely off-guard as they cover in frenzy as more buyers come in off the fence. Eventually, the price peaks and forms an orderly pullback where the highs and lows are literally parallel to each other, forming a tilted Triangle or rectangle.

Upper and lower trend lines are plotted to reflect the parallel diagonal nature. The breakout forms when the upper resistance trend line breaks again as prices surge back towards the high of the formation and explodes through to trigger another breakout and uptrend move. The sharper the spike on the flagpole, the more powerful the bull flag can be.

Bearish Flag:
The bear flag is an upside down version of the bull flat. It has the same structure as the bull flag but inverted. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trend lines, which form the flag.

When the lower trend line breaks, it triggers panic sellers as the downtrend resumes another leg down. Just like the bull flag, the severity of the drop on the flagpole determines how strong the bear flag can be.

The Psychology of a Flag Pattern

Flag patterns start off violently as the ‘other’ side gets caught off guard on the trend move or as bulls/bears become overambitious. On bull flags, the bears get blindsided due to complacency as the bulls charge ahead with a strong breakout causing bears to panic or add to their shorts. Once the stock peaks out, the bears regain some confidence as they add to their short positions only to get trapped again when the breakout forms causing more short covering. Since short-sellers from the initial flagpole run up may still be trapped, the second breakout forming through the flag can be even more extreme in terms of the angle and severity of price move. This is when forced liquidations and margin calls kick in. The same happens on bear flags, just inversely.

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An example of a Bullish flag pattern in a chart:

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