| Bearish Candlestick Patterns Bearish reversal patterns are those that can be identified at the top or near the top of a bullish trend. These patterns are used to indicate a sign of weakness coming into the price and a renewed distribution of the security on the part of market participants. These patterns can be developed with one, two and even three bars. Typically, patterns are considered stronger if they develop over a longer period of time or if they are more pronounced. |
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One-Bar Patterns: Hanging Man
Hanging Men are typically only identified after a prolonged uptrend or extremely bullish move in the stock's price. Unlike a hammer, a hanging man must come after a significant move in the stock's price and therefore requires some time in order to fully develop, but there is no specific amount of time identified as appropriate for the pattern to be complete. Ultimately, look for a very strong move in the stock's price with a small body on top of a long shadow, minimum of twice the length of the body.
Important Keys
Hanging Man
· Trend: Up prior to appearance
· Description: Shadow must be 2 times the length of the body
· Confirmation: Prolonged uptrend with a close in price below the body
· Stop-loss: Below the shadow
Another critical element of a hanging man would be the confirmation, which unlike the hammer is necessary for the pattern to be significant. The confirmation should come with a close in price below the body of the hanging man as a minimum. A stronger signal would be a close in price below the shadow of the hanging man. The general psychology behind a hanging man is simple, but not intuitive. The idea is that bears came into the stock and drove the price down after a prolonged rally and the bulls came back in later on that same day to drive the price back up. The real signal comes on the confirmation with the price of the stock closing lower than the body or shadow of the hanging man. This generally indicates that the bears have gained enough strength to overcome the strong rally of the bulls. This particular pattern can either be open or closed and does not indicate greater strength one way or another.
One-Bar Patterns: Shooting Star
Shooting stars are more common and often indicate weakness in the stocks price. The idea is that the bulls came into the market and drove the price up only to be pushed back by the bears. This particular signal should have confirmation with the next day's activity, with price closing below the body of the shooting star. A stop-loss should be entered above the shadow of the shooting star, which gives the stock room to retest the area of the shadow.
Important Keys
Shooting Star
· Trend: Up prior to appearance
· Description: Shadow must be 2 times the length of the body
· Confirmation: Next day must close below the body
· Stop-loss: Above the shadow
One-Bar Patterns: Tombstone
This is essentially a shooting star without the body, but is considered extremely pronounced and less common than a regular shooting star. The idea is that the market opened and the bulls pushed the price up, but the bears came back in to close the price of the stock at the opening price for the day. There should be little to no shadow on the bottom of this pattern. Remember, the trend must have been up previously for this to count as a bearish reversal pattern.Important Keys
Tombstone
· Trend: Up prior to appearance
· Description: Horizontal line with a long vertical line (Shooting Star without a body)
· Confirmation: Not necessary
· Stop-loss: Above the shadow
Two-Bar Patterns
Two-Bar Patterns: Dark Cloud Cover
The trend of the stock has been strong to the upside and on the open of the signal day the price of the stock is driven down under pressure from the bears, or sellers looking to take profits after the bullish run. This pattern is the exact opposite of a piercing line, which often indicates a sign of strength. Remember, the signal day must close below the middle of the previous candle's body in order to be confirmed. Typically it is not necessary to wait for further confirmation, but you could wait one more day for the price to close even lower than the signal day.Important Keys
Dark Cloud Cover
· Trend: Up prior to appearance
· Description: Signal day must close below the middle of the previous up day
· Confirmation: Not necessary
· Stop-loss: Above the shadow
Make sure you can identify the differences between a Dark Cloud Cover and a Piercing Line. Despite one being bearish and the other bullish, they are essentially the same but on opposite sides of the spectrum. The idea of entering on this particular signal is similar to the piercing line pattern, which is a strong indication of price reversal. You should look to enter your stop above the middle of the previous trading day's body in order to give the price room to retest resistance, which is a common occurrence we will discuss more in the next chapter.
Two-Bar Patterns: Harami
Just as was the case for the bullish harami, the bearish harami is a reversal pattern that requires confirmation of the trend change on the following day prior to entering the trade. Unlike the piercing line or dark cloud cover patterns, which are extremely decisive in their change in direction, the harami indicates a change in direction with indecision. The indecision is represented by the spinning top or doji, which can either be closed or open. Typically the first
Important Keys
Harami
· Trend: Up prior to appearance
· Description: Spinning top or doji inside the previous trading day's range
· Confirmation: Next day must close below body of the spinning top or the doji
· Stop-loss: Above the body of the previous trading day's range
day will be open and the spinning top will be closed, but it is not required. The psychological element of this pattern is that the bulls have been clearly in control until a small spinning top or doji presents itself, which represents the indecision on the part of the bulls. Since a spinning top or doji represents indecision in the market, we are required to wait for the third day for confirmation. The price on the third day needs to close below the body of the spinning top or doji.
Two-Bar Patterns: Bearish Engulfing
The price of the stock has been in a good uptrend, and on the signal Day, the price of the stock opens higher than the previous close and then moves lower to close below the body of the first candle. Simply put, the signal candle is engulfing the previous candle's body. As is the case with any engulfing pattern, the greater the number of days engulfed, the stronger theImportant Keys
Bearish Engulfing
· Trend: Up prior to appearance
· Description: Spinning top or doji inside the previous trading day's range
· Confirmation: Next day must close below body of the spinning top or the doji
· Stop-loss: Above the body of the previous trading day's range
reversal signal, and it is not necessary to engulf the shadows of the previous candle. It is critical that the signal candle's body engulfs entirely the previous candle's body in order to qualify as a bearish engulfing pattern. Typically one should enter that day or on the open of the next day. Your stop-loss should be entered above the middle of the signal candle's body in order to give the price room to retest the middle of this candle, which will act as an area of resistance. Remember that longer-than-normal candles will act as support or resistance in the middle of their bodies. Take a moment and analyze the example on the next page to clearly visualize what a bearish engulfing pattern should look like on your stock charts.
Three-Bar Patterns
Three-Bar Patterns: Evening Star
An evening star is a three-bar reversal pattern and is the exact opposite of a morning star. This particular pattern represents a clear shift in direction and strength for the price of the stock. Typically you should see a strong movement upward followed the next day by a spinning top or doji representing indecision in the market. On the heels of this
Important Keys
Evening Star
· Trend: Up prior to appearance
· Description: Signal day (third day) must close below the middle of the first day
· Confirmation: Confirmed on the signal day with the close below the middle of the first day's trading range
· Stop-loss: Above the spinning top or the middle of the first trading day
indecision the bears come raging into the stock and drive the price down below the middle of the first day's body. It is critical that the signal day closes below the middle of the first day on this particular pattern. If identified correctly, Morning and Evening Stars can represent major shifts in market sentiment and offer a great opportunity to capitalize on major movements in the stock's price. If you enter on the signal day or the following day, enter your stock above the spinning top or above the middle of the first day.
Indecision Patterns
Indecision Patterns: Doji
This one-bar pattern is a sign of indecision in the price movement of the security, but should not be traded without confirmation. The doji is often present with harami and engulfing patterns. It can also show up as the star on the morning or evening star. In all of these patterns it is critical to wait for the confirmation, which often is the signal day.
Important Keys
Doji· Trend: Up/Down prior to appearance
· Description: Looks like a plus sign - signals potential resistance or support
· Confirmation: Confirmed when combined with one of the previously discussed patterns
· Stop-loss: Depends on pattern identified
These patterns often are found alongside spinning tops and indicate a potential area of support or resistance. Take a moment to familiarize yourself with this particular pattern.
Indecision Patterns: Spinning Top
These are similar to the doji in that they represent indecision in the market. These should not be traded without confirmation of a change in price direction. As previously mentioned, these often indicate a potential area of support or resistance in the price of the stock. There is no significance in these being opened or closed patterns.
Important Keys
Spinning Top
· Trend: Up/Down
· Description: Small body with a shadow at the top and bottom - signals potential resistance or support
· Confirmation: Confirmed when combined with one of the previously discussed patterns
· Stop-loss: Depends on pattern identified
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