Candlesticks 4: Bearish Reversal Patterns
Just as there are Bullish Reversal Patterns, there are Bearish Reversal Patterns that will signal the end of a bullish trend and a shift in momentum. These patterns are very similar to those on the bullish side, just that they are inverted. These patterns are:
Shooting Star
The shooting star pattern is the bearish counterpart of the hammer. It is composed by a small body and a long upper shadow. This pattern usually appears at the end of a bullish trend and just as in the hammer, the longer the upper shadow the more bearish the pattern becomes.What's happening when a Shooting Star pattern appears?
At first, there's strong buying pressure but as the stock keeps rising, it meets resistance and that means selling. As more people continiue to sell durint the day, the stock pullbacks harder and ends up closing near it's open or even lower.
Just as with the hammer, you should wait for some bearish confirmation before being sure that the trend has reversed.
After an advance that was punctuated by a long white candlestick, Chevron (CHV)
![[Chv]](http://stockcharts.com/images/minilink_sc.gif)
formed a shooting star candlestick above 90 (red oval). The bearish
reversal pattern was confirmed with a gap down the following day
Bearish Engulfing
The counter-part of the bullish engulfing pattern, the bearish engulfing pattern consists of two candlesticks: the first is
white and the second black. The size of the white candlestick is not
that important, but should not be a doji, which would be relatively easy
to engulf. The second should be a long black candlestick. The bigger it
is, the more bearish the reversal. The black body must totally engulf
the body of the first white candlestick. Ideally, the black body should
engulf the shadows as well, but this is not a requirement.
What's happening when a bearish engulfing pattern appears?
After an advance, the second black candlestick begins to form when residual buying pressure causes the security to open above the previous close. However, sellers step in after this opening gap up and begin to drive prices down. By the end of the session, selling becomes so intense that prices move below the previous open. The resulting candlestick engulfs the previous day's body and creates a potential short-term reversal.
Further weakness is required for bearish confirmation of this reversal pattern.
Example:
After meeting resistance around 30 in mid-January, Ford (F) formed a bearish engulfing (red oval). The pattern was immediately confirmed with a decline and subsequent support break.
What's happening when a bearish engulfing pattern appears?
After an advance, the second black candlestick begins to form when residual buying pressure causes the security to open above the previous close. However, sellers step in after this opening gap up and begin to drive prices down. By the end of the session, selling becomes so intense that prices move below the previous open. The resulting candlestick engulfs the previous day's body and creates a potential short-term reversal.
Further weakness is required for bearish confirmation of this reversal pattern.
Example:
After meeting resistance around 30 in mid-January, Ford (F)
formed a bearish engulfing (red oval). The pattern was immediately confirmed with a decline and subsequent support break. Dark Cloud Cover
The dark cloud cover pattern is the bearish counter-part of the Piercing Pattern. It is composed of two candlesticks, one white and one black. The black candle should open above the previous close and close somewhere between the body of the previous candle. The closer it closes to the previous candle open, the more bearish it is.
What's happening when a bearish engulfing pattern appears?
Just as with the bearish engulfing pattern, residual buying pressure forces prices higher on the open, creating an opening gap above the white candlestick's body. However, sellers step in after the strong open and push prices lower. The intensity of the selling drives prices below the midpoint of the white candlestick's body.
Further weakness is required for bearish confirmation of this reversal pattern.
Example:
After a sharp advance from 37 1/2 to 40.5 in about 2 weeks, Citigroup (C)
formed a dark cloud cover pattern (red oval). This pattern was
confirmed with two long black candlesticks and marked an abrupt reversal
around 40.5.
In his book, Beyond Candlesticks, Steve Nison asserts that any combination of colors can form a harami, but the most bearish are those that form with a black/white or black/black combination.
What's happening when a bearish Harami pattern appears?
Because the first candlestick has a large body, it implies that the bearish reversal pattern would be stronger if this body were black. This would indicate a sudden and sustained increase in selling pressure. The small candlestick afterwards indicates consolidation before continuation. After an advance, black/white or black/black bearish harami are not as common as white/black or white/white variations. A white/black or white/white combination can still be regarded as a bearish harami and signal a potential reversal.
The first long white candlestick forms in the direction of the trend. It signals that significant buying pressure remains, but could also indicate excessive bullishness. Immediately following, the small candlestick forms with a gap down on the open, indicating a sudden shift towards the sellers and a potential reversal.
After a gap up and rapid advance to 30, Ameritrade (AMTD)
formed a bearish harami (red oval). This harami consists of a long
black candlestick and a small black candlestick. The decline two days
later confirmed the bearish harami and the stock fell to the low
twenties.
What's happening when a bearish engulfing pattern appears?
Just as with the bearish engulfing pattern, residual buying pressure forces prices higher on the open, creating an opening gap above the white candlestick's body. However, sellers step in after the strong open and push prices lower. The intensity of the selling drives prices below the midpoint of the white candlestick's body.
Further weakness is required for bearish confirmation of this reversal pattern.
Example:
After a sharp advance from 37 1/2 to 40.5 in about 2 weeks, Citigroup (C)
formed a dark cloud cover pattern (red oval). This pattern was
confirmed with two long black candlesticks and marked an abrupt reversal
around 40.5. Bearish Harami
As I explained in the previous chapter, there are four possible combinations for a harami pattern: white/white, white/black, black/white and black/black. The bullish or bearish nature of a harami depends on the preceding trend. Harami are considered potential bearish reversals after an advance and potential bullish reversals after a decline. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. If the small candlestick is a doji, the chances of a reversal increase.
In his book, Beyond Candlesticks, Steve Nison asserts that any combination of colors can form a harami, but the most bearish are those that form with a black/white or black/black combination.
What's happening when a bearish Harami pattern appears?
Because the first candlestick has a large body, it implies that the bearish reversal pattern would be stronger if this body were black. This would indicate a sudden and sustained increase in selling pressure. The small candlestick afterwards indicates consolidation before continuation. After an advance, black/white or black/black bearish harami are not as common as white/black or white/white variations. A white/black or white/white combination can still be regarded as a bearish harami and signal a potential reversal.
The first long white candlestick forms in the direction of the trend. It signals that significant buying pressure remains, but could also indicate excessive bullishness. Immediately following, the small candlestick forms with a gap down on the open, indicating a sudden shift towards the sellers and a potential reversal.
After a gap up and rapid advance to 30, Ameritrade (AMTD)
formed a bearish harami (red oval). This harami consists of a long
black candlestick and a small black candlestick. The decline two days
later confirmed the bearish harami and the stock fell to the low
twenties.Evening Star
The evening star is the counter-part of the morning star pattern, it consists of three candlesticks:
What's happening when a bearish Harami pattern appears?
The long white candlestick confirms that buying pressure remains strong and the trend is up. When the second candlestick gaps up, it provides further evidence of residual buying pressure. However, the advance ceases or slows significantly after the gap and a small candlestick forms, indicating indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase. The third long black candlestick provides bearish confirmation of the reversal.
Example:
After advancing from 68 to 91 in about two weeks, AT&T (T) formed an evening star (red oval). The middle candlestick is a spinning top,
which indicates indecision and possible reversal. The gap above 91 was
reversed immediately with a long black candlestick. Even though the
stock stabilized in the next few days, it never exceeded the top of the
long black candlestick and subsequently fell below 75.
- A long white candlestick.
- A small white or black candlestick that gaps above the close (body) of the previous candlestick. This candlestick can also be a doji, in which case the pattern would be an evening doji star.
- A long black candlestick.
What's happening when a bearish Harami pattern appears?
The long white candlestick confirms that buying pressure remains strong and the trend is up. When the second candlestick gaps up, it provides further evidence of residual buying pressure. However, the advance ceases or slows significantly after the gap and a small candlestick forms, indicating indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase. The third long black candlestick provides bearish confirmation of the reversal.
Example:
After advancing from 68 to 91 in about two weeks, AT&T (T)
formed an evening star (red oval). The middle candlestick is a spinning top,
which indicates indecision and possible reversal. The gap above 91 was
reversed immediately with a long black candlestick. Even though the
stock stabilized in the next few days, it never exceeded the top of the
long black candlestick and subsequently fell below 75.
How to confirm a reversal pattern?
There will be times when one of these patterns form and, still, the
trend won't change. So, then, how can be we confirm that a reversal
pattern truly indicate a shift in trend?
The answer: VOLUME. Volume is the indicator that is going to help you
confirm a reversal pattern. If a reversal pattern forms with little
volume, it means that just a few traders were involved those days, but
if the reversal pattern includes a lot of volume, it means that there's more people selling as well as traders shorting the stock, so both sides combine,
resulting in high volume days. Always take volume into consideration.
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