Piercing Pattern and Dark Cloud
The Piercing Pattern
This is a two candle formation in a down trending market. The Piercing Pattern indicates a strong possibility of reversal.
The first candle is black, a continuation of the downward trend.
The second candle is white. It opens below the previous day’s low point, and closes above the middle of the previous day, near or at the high for the current day.
Rules:
- The downward trend has been consistent for a good period of time.
- A long black candle appears at the end of the trend.
- The next period opens lower than the low point of the previous time period.
- The white candle closes more than halfway up the black candle.
Signal Strengtheners:
- The longer the candle pair bodies, the greater potential for a stronger reversal.
- The larger gap down from the previous time period close, the stronger the reversal.
- The higher the white candle closes compared to the black candle open, the stronger the reversal.
- Large volume trading during both days can be a significant indicator of the reversal.
General Analysis:
The market trend was on its way down. The stronger the downtrend, the more investor sentiment changes to fear of the end of the trend. The day opens below the previous day’s low because the sellers are trying to push the prices down further. Before the end of the day’s closing, the buyers start buying for the inevitable reversal. This pushes the price up and it closes near the high of the day. The close price of the piercing pattern has almost negated the previous day’s drop, scaring the sellers even more. More buying and less selling the next day will confirm the piercing pattern reversal.
Dark Cloud
This is a two candle formation in an upward trending market. The Dark Cloud Signal indicates an obvious reversal of a trend. It is basically the inverse of the Piercing pattern.
The first candle is white, a continuation of the upward trend.
The second candle is black. It opens above the previous day’s high point, and closes below the middle of the previous day, near or at the low for the current day.length.
Rules:
- The upward trend has been consistent for a good period of time.
- A long white candle appears at the top of the trend.
- The next day opens higher than the high point of the previous day.
- The black candle closes more than halfway down the white candle.
Signal Strengtheners:
- The longer the candle pair bodies, the greater potential for a stronger reversal.
- The larger gap up from the previous days close, the stronger the reversal.
- The lower the black candle closes compared to the white candle open, the stronger the reversal.
- Large volume trading during both days can be a significant indicator of the reversal.
General Analysis:
The market trend was on its way up. The stronger the uptrend, the more investor sentiment changes to fear of the end of the trend. The day opens above the previous day’s low because the buyers are trying to push the prices up further. Before the end of the day’s closing, the market starts selling for the inevitable reversal and/or to take profits. This pushes the price down and it closes near the low of the day. The close price has almost negated the previous day’s gain, scaring the buyers even more. More selling and less buying the next day will confirm the Dark Cloud reversal.
