Last week, we talked about how to identify and trade a “flag” pattern.
But because a flag is really just another way to describe a consolidation range, they can take many different shapes and sizes.
And just like a “bull flag” can lead to a bullish breakout, a “bear flag” can also lead to a bearish breakdown.
That’s what I want to cover today, so let’s jump right in to another technical Tuesday update…
Bear Flag Breakdowns
If an asset is in an uptrend and forms a flag pattern, it is typically referred to as a “bull flag.”
On the other hand, if an asset is in a downtrend and forms a flag, it is referred to as a “bear flag.”
Because a flag is a continuation pattern, the breakout should be in the direction of the overall trend.
So, in a bull market, a bull flag should lead to a bullish breakout, while a bear flag should lead to a bearish breakdown.
Here’s how that looks in the market for Bitcoin futures (BTC), for example…
Regular readers know that I am no fan of Bitcoin and that I have been calling for lower prices for some time now.
But I’m not here to pat myself on the back for being right… Instead, I want to show you what I’ve been seeing all along.
Rinse & Repeat
During the current BTC bear market, the upside-down flagpole began to form as the market dropped from its all time high.
The first bear flag formed for about four months between January and April, and it eventually broke down.
That led to a decline of about 30% before the market began to consolidate again and form another bear flag.
You can see that the second identified flag was much more narrow in its range and also lasted for a much shorter amount of time… Just about a month.
But just like the first one, this flag led to a breakdown and another drop of over 30%.
Now, zooming in on the current BTC market, a third bear flag has just started to break down.
Given what we’ve seen over the past year and how well the bear flag pattern is working in this market, I wouldn’t be surprised to see another big drop from here.
Another 30% move to the downside is certainly not out of the question. And in fact, regular readers know that I believe Bitcoin is going to zero in the long run.
But don’t get greedy on the short side either… The main lesson to learn from our discussion on flags is that “the trend is your friend.”
Sure, you may find some counter-trend trades that work out, but the best way to trade a flag when you see it is typically in the direction of the prevailing trend.
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