What Is a Bullish and Bearish Market?

Jul 22, 2021 07:12 PM ET
What Is a Bullish and Bearish Market?

The expression of a ‘bullish’ and ‘bearish’ market is ubiquitously used. Markets are often described as having ‘bullish’ or ‘bearish’ sentiments. Many analysts and traders also use these terms to give a prediction of future market trends. As an investor, the trends of markets have seismic effects on your portfolios and strategies.

Traders will navigate through different market conditions well if they understand these two concepts.

What is a bullish market?

We say that the market is bullish when prices grow and are anticipated to be higher in the near future. The foundation of a bull market lies in optimism, consumer confidence, and expectations of the continual price increase. 

With regards to supply and demand, during a bull market, there is a high level of demand and a low supply. 

When market prices are on an appreciating trend, new investors will look to join the market to stock up their portfolios. Investors with the security will speculate that prices will keep increasing, therefore reluctant to sell. As a result of increased demand and decreased supply, we will observe higher trading volumes and higher prices. 

In terms of the economy, a bull market results in a thriving and developing economy. There will be decreased unemployment. Thus, everyone will have more money to spend and a higher willingness to spend it. 

How to spot a bull market

One of the ways to identify market changes is through candlesticks chart analysis. Candlesticks display the movement of an asset’s price. The basic knowledge of candlesticks can guide traders’ decision-making by spotting the patterns of resistance levels. A bull market usually comes after the price reversal of a downward trend. At these points, traders start opening long positions to profit from the upward path.

Below are the five most common candlestick patterns that may precede a bull market.

Hammer

The hammer shows a strong selling pressure but even stronger buying, which results in a positive price change throughout the day. 


Hammer
The colour of this candle can either be blue or red. Either way, this could indicate the market is bullish. 

Inverse hammer

This candlestick shows such a strong buying pressure that ultimately, the selling pressure could not out-power. Inverse hammer

The inverse hammer indicates a shift in the market that the buyers will soon have more control over the market. 

British engulfing

This pattern is a formation of two candlesticks. The first candle is red, followed by a green candle showing that the bulls outpower the bears. 


British engulfing
Even though the second day’s opening price might be lower than the first, the higher closing price suggests that the market sentiment is bullish. 

Morning star

This pattern is a combination of three sticks. Normally, the middle candlestick does not overlap with the two adjacent sticks as there are market gaps both on open and close. Morning star
It is a sign that the downtrend is slowly transitioning into an uptrend with a ‘neutral’ candle in the middle.

Three white soldiers

Lastly, this is the most obvious candle pattern that represents a bull-run. Three consecutive green candles with increasing closing prices show that the price is rising three days in a row, assuming you use a daily time frame.

Three white soldiers

This shows a gradual increase in buying pressure, which is more indicative of a bull-run than a change in sentiment, which can just be a price correction phase. 

What to do in a bullish market

An understanding of the bull market and its patterns can help you accurately identify the bottom of a cycle. Join the market and acquire more assets at the beginning of a bull run. By doing this, you will buy assets at their lowest price and have the potential to have the most capital gain by the end of the bull run. 

Cautious traders with more capital can accumulate positions during the uptrend. You might not be sure that a certain indicator is entirely accurate in predicting a bull-run, so you can split up your capital. Invest a small amount at the start and if the market continues to thrive, confirming a bull-run, add to your position with the rest of your investment.  

In this type of market, investors tend to pick more adventurous assets as they will have the highest potential of yielding a high percentage return. This choice comes from the higher confidence enforced by the very small chance of losses (if any) in a bull market.

At the end of a bull run, look for sufficient liquidity to sell your assets, thus exiting your long positions. 

What is a bearish market?

A bearish market is the opposite of a bullish market, where prices are falling or are predicted to fall. The foundation of a bearish market is the negative market sentiment with fear, uncertainties, and doubts. 

In a bear market, there is an excess in supply. High supply is the result of the uncertainty and consumer psychology of wanting to sell to avoid losses. Traders speculate that prices will fall; therefore, they are not willing to accumulate more assets. As a result, there is still a high trading volume, but the prices are decreasing.

Another reason for a price decrease is a lack of consumer confidence. This keeps money out of the market, and prices fall due to the increased outflow of money. 

A bear market usually represents a weak economy. Markets and the economy are strongly linked; therefore, checking the state of the economy can indicate the current state of the market and how it’s likely to perform in the future. 

How to spot a bear market

Bear markets usually start at the end of a bull cycle when prices are high. Here are the five most common candlestick charts that could indicate a bear market. The patterns of the candlesticks are the opposite of bullish ones. 

Hanging man

This is the bearish equivalent of the ‘Hammer.’ It signifies that there is a big sell-off pressure. The ‘Hanging Man’ normally occurs at the peak of a price cycle.  Hanging man
The colour of the candle is not significant because the minimum price is still low, as shown by the long downward wick. However, a red candle is a stronger indication that market sentiment might be bearish. 

Shooting star

The Shooting star is the opposite shape of an inverse hammer. This shows that the closing price is much lower than the highest price within the day. Shooting star

Such a phenomenon could be an indication that the bears are starting to take over the market, and prices will continue to decrease. 

Bearish engulfing

The bearish engulfing is similar to a bullish engulfing. This pattern is usually found at the end of an uptrend. 

Bearish engulfing

The turning point is signified by a big red candle that closes below the last green candle’s open.

Evening star

An evening star is the opposite of a morning star. It is formed by three candles: the middle candle is the small one between two larger candles. This is a sign that the market is at the turning point of a bearish market.Evening star

The middle candle represents a transitioning phase. This is a sign that the market is at the turning point of a bearish market.

Three black crows

This candlestick pattern is formed by three consecutive red candles. This shows that prices are decreasing three days in a row which could signify a quick drop-off in prices in the near future. Three black crows
The successive decrease in prices shows that the change in price is not due to fluctuation but rather a shift towards a bearish market. 

What to do in a bear market

Understanding bear market patterns allow you to recognize a shift of market phases and help you identify the possible ‘top’ of the price cycle. At the beginning of a bear-run, liquidate your assets to avoid losses and maximise capital gains. 

It is easy to accrue losses during a bear market; therefore, investors and traders tend to choose safer options. These include having short positions or safer investments in fixed-income securities, such as defensive stocks. 

At the end of a bear market, start adding to your investment portfolio and invest while prices are low. The earlier you rejoin the market at the end of a bear-run, the higher potential there is for capital gains.


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