THE HAnDbook oF TECHnICAl AnAlysIsof the preexisting uptrend imbues the formation with an element of extrinsic
bullishness.
In Figure 4.10 we observe a bear flag formation triangle as continuation with-
in a trend phase. The bear flag consolidation is confirmed once price violates the
pattern. Notice the preceding distribution phase leading to a strong downside
breakout. Note that the flag’s intrinsic bias is in agreement with the bearish trend
sentiment, which greatly increases the potential for a reliable downside follow
through, as observed on the chart.
In Figure 4.11 we observe an accumulation range comprising two adjacent
ascending triangles, swiftly followed by the trend phase in a powerful break-
out, evidenced by the large upside gap in prices at the point of breakout. A
new consolidation forms after some trending action, in the form of an ascend-
ing triangle. Prices subsequently break down and decline and fail to follow
through as a bullish pattern. This drives home the point that technical fore-
casting is based on probabilities, and never on certainties. Although the trend
sentiment and intrinsic bias were in perfect agreement, there is not enough
information on the chart to determine if the triangle’s extrinsic bias is bull-
ish or bearish. Should the triangle have formed around the price level of a
significant historical peak, then it would be deemed as extrinsically bearish.
Nevertheless, as far as the trader is concerned, failed patterns often times lead
to a more powerful reaction and consequently a more profitable venture. In
technical analysis, the element of surprise or of the unexpected should never be
underestimated. Notice volume declining as breakout approaches. Note that
the second ascending triangle is both intrinsically and extrinsically bullish,
since it is forming within a clear and obvious support area in the market, as
evidenced by the first ascending triangle.
figure 4.10 Bear Flag Formation as Distribution on the Sub‐Hourly EURUSD Chart.
Source: MetaTrader 4