3 Bearish Patterns in Trading

In technical analysis, charts revealing bearish patterns can suggest to traders that a company's share price may tumble over the ensuing days or months. While this may or may not unfold, even a well thought-out trade could turn sour due to unexpected news such as an earnings miss, worsening market sentiment, or world events. Here are three ways bearish technical traders look for early signs of decline.

This reversal pattern can mark the end of an uptrend. It is one of the shortest bear patterns, generally taking just three to five days to form.

The first indication of an island top is a significant gap up, or sharply higher price at the open, following an upward price trend. If, after a few days of trading in a narrow range, the stock experiences a commensurate gap back down—creating a distinct peak, or island top—it may mean the uptrend has reversed.

Given the short time frame, island tops can be difficult to detect. Strong trading volume when the stock gaps down can act as a confirming signal.

This short-term bearish pattern occurs when a longer-term downtrend briefly rebounds. It can help traders determine whether the stock's descent is over or will continue, and it typically takes from five days to three weeks to form.

A bear flag begins with the "flagpole," which develops from a swift decrease in price. When the stock finds a near-term low and it trades within a tight range for a period of days, the high and low trend lines will form the flag—the shape of which can be horizontal or upward sloping. Proponents of the bear flag pattern say that if the price breaks below the flag's lower trend line, the stock is likely to resume its prior downtrend.

This reversal pattern may indicate the end of a long-term uptrend and the beginning of a downtrend, usually denoting a major shift in sentiment. It typically takes at least a month and sometimes as much as a year to form.

A double top pattern forms when a strong uptrend is followed by two distinct peaks at roughly the same price level with a trough in between. Fans of this pattern say if the price breaks below the trough, a downtrend may be forthcoming.

Downward price movements can happen much faster than upside moves—and they also reverse more quickly—so traders need to be nimble when trading bear patterns.

For this reason, traders may consider starting with smaller positions and setting firm price targets for closing those out. Using trailing stop orders can also help manage sudden reversals, which can eat into profit or create losses.