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Bears, Bearish and Bear Markets Explained

Beginner

Any negative person can be referred to as being a “bear” and, as such, they can be described as “bearish”. The term is most commonly associated with trading in financial markets.  

In the world of finance, a bear is a market participant that is negative about the direction of markets. They subsequently believe that prices will be moving consistently lower. The term “bear” is also used when looking at a market price that is in strong decline. This is referred to as a “bear market”.

Bear

In technical analysis, price trends and pattern analysis that have a negative outlook are described as being “bearish” formations. From a trading perspective, a market participant that has a bearish outlook on an instrument, would either be looking to sell or prefer to be short to profit from a decline in the price.

The opposite of bears, bearish and bear markets are “bulls”, “bullish” and “bull markets”. Bullish traders are positive and are expecting market prices to move higher.

Origin of the “bear”

“Bulls” and “Bears” have been used as terms to describe traders in financial markets since the 1700s. The earliest reference came in The Tatler in 1709:

“I fear the word Bear is hardly to be understood among the polite people; but I take the meaning to be, that one who insures a real value upon an imaginary thing, is said to sell a Bear…”

The term originates with the “bearskin jobbers”. These were traders who bought and sold bearskins and were known as “bears”. They sold the bearskins on the market before the bears had been caught. Subsequently, they wanted the prices to fall so that they could pay a cheaper price on delivery of the skins and therefore make a profit from the decline.

The origin of the term “bull” is less certain, but it is likely to have been a counter to the term “bear”. Bull and bear fights were historically popular and they were seen as opponents. There is also a suggestion that it derives from how the animals fight. A bull attacks from low and pushes up with its head and horns. A bear has an opposing fighting style, standing tall to then swipe downwards. So in their movement, a bull thrusts up whilst a bear stoops down.

Bear Markets

Commentators will sometimes be lazy in referring to a consistently strong decline in price as being in a “bear market”. However, the term comes with a strict definition, at least amongst equity markets. A bear market is one where the price has fallen by more than 20% from a recent key high.

Markets do not tend to move in straight lines and can often be subject to retracements. A “bear market rally” is a near-term rebound in the price that unwinds a medium to longer-term bear market downtrend. Bear market rallies tend to be short-lived and can often undershoot their recovery targets. They tend to provide another chance to sell before the prevailing bearish trend resumes.

Bearish market conditions

Several conditions can derive a negative market outlook. These factors can combine to create a bearish feeling among traders:

  • Tight (or aggressive) monetary policy
  • Very high inflation
  • Very low or negative economic growth
  • Strongly rising unemployment
  • A negative trend in consumer confidence
  • Significant geopolitical instability

From a technical analysis perspective, here is a list of common trading bearish set-ups and patterns that indicate a subsequent decline in the price:

  • Strong downtrend
  • Falling moving averages
  • Double Top
  • Triple Top
  • Head and shoulders top
  • Descending triangle
  • Bear flag
  • Shooting Star candlestick pattern
  • Hanging Man candlestick pattern
  • Bearish Engulfing candlestick pattern
  • Evening Star candlestick pattern
  • Dark Cloud Cover candlestick pattern

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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