Candlestick Bearish Reversal Patterns
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A bearish reversal candlestick pattern is a sequence of price actions or a pattern, that signals a potential change from uptrend to downtrend. It's a hint that the market sentiment may be shifting from buying to selling.
There are dozens of bearish reversal patterns. We have elected to narrow the field by selecting a few of the most popular patterns for detailed explanations. For a complete list of bearish and bullish reversal patterns, see Greg Morris' book, . Below are some of the key bearish reversal patterns, with the number of candlesticks required in parentheses.
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It is important to remember the following guidelines relating to bearish reversal patterns:
Most patterns require further bearish confirmation.
Bearish reversal patterns should form within an uptrend.
Other aspects of technical analysis should be used as well.
Bearish reversal patterns can form with one or more candlesticks; most require bearish confirmation. The reversal indicates that selling pressure overwhelmed buying pressure for one or more days, but it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower.
The security is trading above its 20-day exponential moving average (EMA).
Each reaction peak and trough is higher than the previous.
The security is trading above a trend line.
These are just three possible methods. Some traders may prefer shorter uptrends and qualify securities that are trading above their 10-day EMA. Defining criteria will depend on your trading style, time horizon, and personal preferences.
The bearish abandoned baby resembles the evening doji star and also consists of three candlesticks:
A long white candlestick.
A doji that gaps above the high of the previous candlestick.
A long black candlestick that gaps below the low of the doji.
The main difference between the evening doji star and the bearish abandoned baby are the gaps on either side of the doji. The first gap up signals a continuation of the uptrend and confirms strong buying pressure. However, buying pressure subsides after the gap up and the security closes at or near the open, creating a doji. Following the doji, the gap down and long black candlestick indicate strong and sustained selling pressure to complete the reversal. You don't need additional bearish confirmation.
Delta (DAL) formed an abandoned baby to mark a sharp reversal that carried the stock from $57.50 to $47.50. Although the open and close aren't equal, the small white candlestick in the middle captures the essence of a doji. Indecision is reflected in the small body and equal upper and lower shadows. In addition, the middle candlestick is separated by gaps on either side, which adds emphasis to the reversal.
The bearish engulfing pattern consists of two candlesticks: the first is white and the second black. The size of the white candlestick is relatively unimportant, but it 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. Shadows are permitted, but they are usually small or nonexistent on both candlesticks.
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.
The bearish harami is made up of two candlesticks. The first has a large body, and the second a small body encompassed by the first. There are four possible combinations: white/white, white/black, black/white, and black/black. Whether a bullish reversal or bearish reversal pattern, all harami look the same. Their bullish or bearish nature depends on the preceding trend. Harami are considered potential bearish reversals after an advance and potential bullish reversals after a decline. No matter 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.
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.
In the chart below, after a gap up and rapid advance to $30, a bearish harami (red oval) formed. 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 20s.
In the chart below, you see a bearish harami with a long white candlestick and a small black candlestick (red oval).
The long white candlestick confirmed the direction of the current trend. However, the stock gapped down the next day and traded in a narrow range. The decline three days later confirmed the pattern as bearish.
The dark cloud cover pattern is made up of two candlesticks; the first is white and the second black. Both candlesticks should have fairly large bodies and the shadows are usually small or nonexistent, though not necessarily. The black candlestick must open above the previous close and close below the midpoint of the white candlestick's body. A close above the midpoint might qualify as a reversal, but would not be considered as bearish.
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.
In the chart below, after a sharp advance from $37.50 to 40.50, which took two weeks, a dark cloud cover pattern formed (red oval). This pattern was confirmed with two long black candlesticks and marked an abrupt reversal around $40.50.
The evening star consists of three candlesticks:
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.
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 trend reversal. If the small candlestick is a doji, the chances of a reversal increase. The third long black candlestick provides bearish confirmation of the reversal.
The chart below shows an evening star (red oval) formed after the stock advanced from $68 to $91.
The shooting star is made up of one candlestick (white or black) with a small body, long upper shadow, and small or nonexistent lower shadow. The size of the upper shadow should be at least twice the length of the body, and the high/low range should be relatively large. Large is a relative term and the high/low range should be large relative to the range over the last 10-20 days.
The chart below shows a shooting star (red oval) candlestick above $90. This was after an advance in the stock price that was punctuated by a long white candlestick. The bearish reversal pattern was confirmed with a gap down the following day.
Candlesticks provide an excellent means to identify short-term reversals but should not be used alone. Other aspects of technical analysis can and should be incorporated to improve the robustness of bearish reversal patterns.
In January 2000, Nike (NKE) gapped up over five points and closed above $50. A candlestick with a long upper shadow formed, and the stock subsequently traded down to $45. This established a resistance level of around $53.
Combine all three aspects for the ultimate signal to take it one step further. Look for a bearish candlestick reversal in securities trading near resistance with weakening momentum and signs of increased selling pressure. Such signals would be relatively rare but could offer above-average profit potential.
Many signals came together for RadioShack (RSH) in early October 2000 (see chart below). The stock traded up to resistance at $70 for the third time in two months and formed a dark cloud cover pattern (red oval). In addition, the long black candlestick had a long upper shadow to indicate an intraday reversal.
Bearish confirmation came the next day with a sharp decline. The negative divergence in the MACD and extremely weak money flows also provided further bearish confirmation.
A bearish reversal candlestick pattern is a vital tool in technical analysis, allowing traders to predict a potential downturn in an existing upward trend. These patterns, however, require further bearish confirmation. And it’s important to remember that all of them should form within an existing uptrend. Although they provide an excellent means to identify short-term reversals, they should be used in conjunction with other aspects of technical analysis such as resistance, momentum, and money flows. Understanding these patterns, alongside other market indicators and trends, can significantly enhance your trading strategy and help you make better-informed trading decisions.
Without confirmation, many of these patterns would be considered neutral and merely indicate a potential level at best. Bearish confirmation means further downside follow through, such as a , long black candlestick, or high decline. Because candlestick patterns are short-term and usually effective for 1-2 weeks, bearish confirmation should come within 1-3 days.
Time Warner (TWX) advanced from the upper fifties to the low seventies in less than two months (see chart below). The long white candlestick that took the stock above $70 in late March was followed by a in the position. A second long-legged doji immediately followed and indicated that the uptrend was beginning to tire. The (red oval) increased these suspicions and bearish confirmation was provided by the long black candlestick (red arrow).
To be considered a bearish reversal, there should be an existing uptrend to reverse. It does not have to be a major uptrend, but should be up for the short term or at least over the last few days. A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish reversal patterns within a downtrend would simply confirm existing selling pressure and could be considered .
There are many methods available to determine the trend. An uptrend can be established using , peak/trough analysis or trend lines. A security could be deemed in an uptrend based on one or more of the following:
After meeting around $30 in mid-January, Ford (F) formed a bearish engulfing pattern (red oval). It was immediately confirmed with a decline and subsequent support break.
Note: The Bearish Engulfing candlestick pattern is similar to the , but does not require the entire range (high and low) to be engulfed, just the open and close.
In his book, , 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. 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.
The middle candlestick is a , indicating 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 fell below $75.
For a candlestick to be in star position, it must gap away from the previous candlestick. In , Greg Morris indicates that a shooting star should from the preceding candlestick. However, in , Steve Nison provides a shooting star example that forms below the previous close. There should be room to maneuver, especially when dealing with stocks and indices, which often open near the previous close. A gap up would enhance the robustness of a shooting star, but the essence of the reversal should not be lost without the gap.
After an advance back to resistance at $53, the stock formed a pattern (red oval). Bearish confirmation came when the stock declined the next day, gapped down below $50, and broke its short-term trend line two days later.
Use oscillators to confirm weakening momentum with bearish reversals. Negative in , , , , or indicate weakening momentum and can increase the robustness of a bearish reversal pattern. In addition, bearish moving average crossovers in the PPO and MACD can provide confirmation, and trigger line crossovers for the Slow Stochastic Oscillator.
Use volume-based indicators to assess selling pressure and confirm reversals. (OBV), , and the can be used to spot negative divergences or simply excessive selling pressure. Signs of increased selling pressure can improve the robustness of a bearish reversal pattern.
StockCharts.com maintains a list of all stocks that currently have common candlestick patterns on their charts in the area. To see these results, and then scroll down until you see the “Candlestick Patterns” section. The results are updated throughout each trading day.
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