A bullish market for a currency pair occurs when its exchange rate is rising overall, while a bearish market is characterized by a generally falling exchange rate.
Technical analysts can identify current bullish and bearish market conditions by consulting exchange rate charts for recognizable chart patterns, by computing various technical indicators and by looking at nearby support and resistance levels for a particular currency pair. They can also observe various reversal signals that indicate when a bullish market may be ready to turn into a bearish market, or vice versa.
The following sections describe how they might do this by looking for traits characteristic of forex market trends or reversals that can be bullish or bearish, depending on the signals observed.
Bullish and Bearish Chart Patterns
Some of the more reliable chart patterns that can help you identify bullish and bearish markets include the following:
Continuation Chart Patterns – These include channels, flags and pennants. If they are rising, they are bullish patterns, if falling, they are bearish.
Reversal Chart Patterns – Bullish reversal patterns indicate a falling market is ripe for a counter-trend reversal to the upside. These include descending wedges, as well as head and shoulder, double, triple or saucer bottom patterns. Bearish reversal patterns include ascending wedges, as well as head and shoulder, double, triple or saucer top patterns.
Candlestick Chart Patterns – When an engulfing pattern appears on a Japanese candlestick chart, it can be a good bullish or bearish signal. The bullish engulfing pattern is characterized by a small down candle followed by a larger up candle, the body of which completely engulfs the entire body and tails of the preceding candle.
Bullish and Bearish Indicators and Divergence
Technical traders might look for a bullish market trend indicator like the price or a shorter term moving average having a higher level than a longer term moving average. A bearish trend would be indicated by the shorter term moving average being situated below the longer term average.
Furthermore, when the divergence of momentum indicators — such as the Relative Strength Index (RSI), the Stochastics Oscillator and the Moving Average Convergence Divergence (MACD) indicator — is observed relative to the exchange rate in extreme territory, this can be used to forecast that bullish or bearish reversals are likely in the near future.
For example, a bearish signal would occur when the Relative Strength Index fails to make a new high, but the exchange rate does make a new high when the RSI is reading in overbought territory over the 70 level.
Bullish and Bearish Chart Levels
Chart points are typically identified by reviewing an exchange rate chart for key reversal points. If these points appear above the current rate, they are considered resistance, but when they appear below, they represent support. The proximity and importance of chart points to the current exchange rate can be either bullish or bearish.
A bullish chart point signal would occur when nearby levels show strong support for the exchange rate, while more distant resistance levels seem relatively weak. Conversely, a bearish chart point signal would occur when nearby levels show strong resistance for the exchange rate, while more distant support levels seem relatively weak.