The Japanese word for Hammer ton- kachi also means the ground or soil. A Hanging Man occurs at the top of a trend or during an uptrend. The name Hanging Man kubitsuri comes from the fact that this candle line looks somewhat like a man hanging. Another candle line similar to the Hammer is the Takuri pro- nounced taguri line. This Japanese word equates with climbing a rope or hauling up. The motion is not smooth and could be related to pulling up an anchor with your hands: as you change hands; the upward move- ment is interrupted momentarily.
A Takuri line has a lower shadow at least three times the length of the body, whereas the lower shadow of a Hammer is a minimum of only twice the length of the body. Rules of Recognition 1. The small real body is at the upper end of the trading range. The color of the body is not important. The long lower shadow should be much longer than the length of the real body, usually two or three times.
There should be no upper shadow, or if there is, it should be very small. Scenarios and Psychology behind the Pattern Hammer The market has been in a downtrend, so there is an air of bearishness. The market opens and then sells off sharply. However, the sell-off is abated and the market returns to, or near, its high for the day. The failure of the market to continue the selling reduces the bearish sen- timent, and most traders will be uneasy with any bearish positions they might have.
If the close is above the open, causing a white body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading day.
Hanging Man For the Hanging Man, the market is considered bullish because of the uptrend. In order for the Hanging Man to appear, the price action for the day must trade much lower than where it opened, then rally to close near the high.
This is what causes the long lower shadow, which shows how the market just might begin a sell-off. If the market opens lower the next day, there would be many participants with long posi- tions that would want to look for an opportunity to sell.
Steve Nison claims that a confirmation that the Hanging Man is bearish might be that the body is black and the next day opens lower.
This trait, when used on the Hammer, will change its name to a Takuri line. Takuri lines are generally more bullish than Hammers. A Hanging Man with a black body is more bearish than one with a white body. Like- wise, a Hammer with a white body would be more bullish than one with a black body.
As with most single candlestick patterns like the Hammer and the Hanging Man, it is important to wait for confirmation. This confir- mation may merely be the action on the open of the next day. Many times, though, it is best to wait for a confirming close on the follow- ing day. That is, if a Hammer is shown, the following day should close even higher before bullish positions are taken.
The lower shadow should be, at a minimum, twice as long as the body, but not more than three times. The upper shadow should be no more than 5 to 10 percent of the high-low range. The low of the body should be below the trend for a Hammer and above the trend for a Hanging Man. Pattern Breakdown The Hammer and the Hanging Man patterns, being single candle lines, cannot be reduced further.
See Paper Umbrella in Chapter 2. In most instances, the Dragonfly Doji would be more bearish than the Hanging Man. Fleetwood 6. Chevron Remem- ber that the opening marubozu does not have a shadow extending from the open end of the body.
The bullish Belt Hold Figure is a white opening marubozu that occurs in a downtrend. It opens on the low of the day, rallies significantly against the previous trend, and then closes near its high but not necessarily at its high. The bearish Belt Hold Figure is a black opening marubozu that occurs in an uptrend.
Similarly, it opens on its high, trades against the trend of the market, and then closes near its low. Longer bodies for Belt Hold lines will offer more resistance to the trend that they are countering. Belt Hold lines, like most of the single-day patterns lose their importance if there are many of them in close proximity.
The Japan- ese name of yorikiri means to push out. Steve Nison coined the name of the Belt Hold. The Belt Hold line is identified by the lack of a shadow on one end. The bullish white Belt Hold opens on its low and has no lower shadows.
The bearish black Belt Hold opens on its high and has no upper shadows. Scenarios and Psychology behind the Pattern The market is trending when a significant gap in the direction of trend occurs on the open. From that point, the market never looks back: All further price action that day is the opposite of the previous trend. This causes much concern, and many positions will be covered or sold, which will help accentuate the reversal.
Like the Masubozu, the Belt Hold will form the first day of many more advanced candle patterns. Williams The shadows are not considered in this pattern. When this occurs near a market top, or in an uptrend, it indicates a shifting of the sentiment to selling. A yin Tsutsumi after an uptrend is called the Final Daki line and is one of the Sakata tech- niques discussed in a later chapter. If the bearish Engulfing pattern appears after a sustained move, it increases the chance that most bulls are already long.
In this case, there may not be enough new money bulls to keep the market uptrend intact. An Engulfing pattern is similar to the traditional outside day. Just like the Engulfing pattern, an outside day will close with prices higher and lower than the previous range with the close in the direc- tion of the new trend. A definite trend must be underway. This does not mean, however, that either the top or the bottom of the two bodies cannot be equal; it just means the both tops and both bottoms cannot be equal.
The second real body of the engulfing pattern should be the opposite color of the first real body. Scenarios and Psychology behind the Pattern Bearish Engulfing Pattern An uptrend is in place when a small white body day occurs with not much volume.
The next day, prices open at new highs and then quickly sell off. The sell-off is sustained by high volume and finally closes below the open of the previous day. A similar, but opposite, scenario would exist for the bullish En- gulfing pattern. Pattern Flexibility The second day of the Engulfing patterns engulfs more than the real body; in other words, if the second day engulfs the shadows of the first day, the success of the pattern will be much greater.
The color of the first day should reflect the trend of the market. In an uptrend, the first day should be white, and vice versa. The color of the second, or the engulfing day, should be the opposite of the fist day. Pattern Breakdown The bullish Engulfing pattern reduces to a Paper Umbrella or Ham- mer, which reflects a market turning point Figure The bearish Engulfing pattern reduces to a pattern similar to the Shooting Star or possibly a Gravestone Doji, if the body is very small Figure The bullish Engulfing pattern would become the Three Outside Up pattern if the third day closed higher.
Likewise, the bear- ish Engulfing pattern would make up the Three Outside Down pat- terns if the third day closed lower. The Engulfing pattern is also a follow-through, or more advanced stage, of the Piercing Line and the Dark Cloud Cover.
Because of this, the Engulfing pattern is considered more important. Rowan Costco Harami is a Japan- ese word for pregnant or body within. You will find that in most instances the real bodies in the Harami are opposite in color, also like the Engulfing pattern.
You will probably note that the Harami is quite similar to the tra- ditional inside day. The difference, of course, is that the traditional inside day uses the highs and lows, whereas the Harami is concerned only with the body open and close.
The Harami requires that the body of the scond day be completely engulfed by the body of the first day. A long day is preceded by a reasonable trend. The color of the long first day is not as important, but it is best if it reflects the trend of the market. A short day follows the long day, with its body completely inside the body range of the long day. Just like the Engulf- ing day, the tops or bottoms of the bodies can be equal, but both tops and both bottoms cannot be equal. The short day should be the opposite color of the long day.
Scenarios and Psychology behind the Pattern Bullish Harami A downtrend has been in place for some time. A long black day with average volume has occurred, which helps to perpetuate the bearish- ness. The next day, prices open higher, which shocks many compla- cent bears, and many shorts are quickly covered, causing the price to rise further. The price rise is tempered by the usual late comers seeing this as an opportunity to short the trend they missed the first time. Volume on this day has exceeded the previous day, which suggests strong short covering.
A confirmation of the reversal on the third day would provide the needed proof that the trend has reversed. Bearish Harami An uptrend is in place and is perpetuated with a long white day and high volume. In view of this sudden deterioration of trend, traders should become concerned about the strength of this market, especially if volume is light.
It certainly appears that the trend is about to change. Confirmation on the third day would be a lower close. Pattern Flexibility The long day should reflect the trend.
In an uptrend the long day should be white and a downtrend should produce a black long day. The amount of engulfing of the second day by the first day should be significant.
The long day should engulf the short day by at least 30 percent. Remember that long days are based upon the data preceding them. The bearish Harami reduces to a Shooting Star line, which also is a bearish line Figure Both the bullish and the bearish Harami are supported by their single-line breakdowns.
Time Warner Anheuser Busch It is the relative size of these two bodies that make the Harami important. Remember that Doji days, where the open and close price are equal, represent days of indecision. Therefore, small body days that occur after longer body days can also represent a day of indeci- sion.
The more the indecision and uncertainty, the more likelihood of a trend change. The Harami Cross is a better reversal pattern than the regular Harami. A long day occurs within a trending market. The second day is a Doji open and close are equal. The second-day Doji is within the range of the previous long day. Scenarios and Psychology behind the Pattern The psychology behind the Harami Cross starts out the same as that for the basic Harami pattern. A trend has been in place when, all of a sud- den, the market gyrates throughout a day without exceeding the body range of the previous day.
Volume of this Doji day also drys up, reflecting the complete lack of decision of traders. A significant reversal of trend has occurred. Pattern Flexibility The color of the long day should reflect the trend. The Doji can have an open and a close price that are within 2 to 3 percent of each other if, and only if, there are not many Doji days in the preceding data.
Pattern Breakdown The bullish and bearish Harami Crosses reduce to single lines that sup- port their interpretation in most instances Figure and The body of the single-day reduction can be considerably longer than what is allowed for a Paper Umbrella or Hammer line. The fact that the breakdown is not contrary to the patter is supportive. The Rising and Falling Three Method patterns are continuation pat- terns, which are in conflict with the signal given by the Harami Cross. ADP Check Point Similar to its cousin the Hammer, it occurs in a downtrend and represents a possible reversal of trend.
Common with most single- and double- candlestick patterns, it is important to wait for verification, in this case bullish verification. Additionally, there is little ref- erence to this pattern in Japanese literature. Shooting Star The Shooting Star Figure is a single-line pattern that indicates an end to the upward move. It is not a major reversal signal. The Shooting Star line looks exactly the same as the Inverted Hammer. The difference, of course, is that the Shooting Star occurs at market tops.
A rally attempt was completely aborted when the close occurred near the low of the day. Rules of Recognition Inverted Hammer 1. A small real body is formed near the lower part of the price range. No gap down is required, as long as the pattern falls after a downtrend. The upper shadow is usually no more than two times as long as the body. The lower shadow is virtually nonexistent. Shooting Star 1. Prices gap open after an uptrend.
The upper shadow is at least three times as long as the body. A rally throughout the day fails to hold and the market closes near its low.
Similar to the scenario of the Hammer and the Hanging Man, the opening of the following day is crucial to the success or fail- ure of this pattern to call a reversal of trend. Similarly, an Inverted Hammer could easily become the middle day of a more bullish Morning Star pattern. Shooting Star During an uptrend, the market gaps open, rallies to a new high, and then closes near its low.
This action, following a gap up, can only be considered as bearish. Certainly, it would cause some concern to any bulls who have profits. Pattern Flexibility Single-day candlesticks allow little flexibility.
The length of the shadow will help in determining its strength. The upper shadow should be at least twice the length of the body.
There should be no lower shadow, or at least not more than 5 to 10 percent of the high- low range. Like most situations, the color of the body can help, if it reflects the sentiment of the pattern. The Inverted Hammer pattern reduces to a long black candle line, which is always viewed as a bearish indica- tion when considered alone Figure The Shooting Star pattern reduces to a long white candle line, which almost always is consid- ered a bullish line Figure Both of these patterns are in direct conflict with their breakdowns.
This indicates that further confirma- tion should always be required before acting on them. Jones Apparel Reebok This pattern occurs in a downtrending market and is a two-line or two-day pat- tern. The first day is black, which supports the downtrend and the second day is a long white day, which opens at a new low and then closes above the midpoint of the preceding black day.
Kirikomi means a cutback or a switchback. The first day is a long black body continuing the down- trend. Scenarios and Psychology behind the Pattern A long black body forms in a downtrend, which maintains the bear- ishness.
However, the market rallies all day and closes much higher. In fact the close is above the midpoint of the body of the long black day.
This action causes concern to the bears and a poten- tial bottom has been made. Candlestick charting shows this action quite well, where standard bar charting would hardly discern it.
There is no flexibility to this rule with the Piercing pattern. Both days of the Piercing pattern should be long days. The second day must close above the midpoint and below the open of the first day, with no exceptions. Pattern Breakdown The Piercing Line pattern reduces to a Paper Umbrella or Hammer line, which is indicative of a market reversal or turning point Figure The single candle line reduction fully supports the bullishness of the Piercing Line.
Related Patterns Three patterns begin in the same way as the Piercing Line. However, they do not quite give the reversal signal that the Piercing Line does and are considered continuation patterns. The bullish Engulfing pattern is also an extension, or more mature situation, of the Piercing Line.
Because this pattern only occurs in an uptrend, the first day is a long white day. This is one of the few times that the high or low is used in candle pat- tern definitions. Trading lower throughout the day results in the close being below the midpoint of the long white day. This reversal pattern, like the opposite Piercing Line, has a marked effect on the attitude of traders because of the higher open followed by the much lower close.
There are no exceptions to this pattern. Kabuse means to get covered or to hang over. The first day is a long white body, which is continuing the uptrend. The second black day closes within and below the mid- point of the previous white body. Typical in an uptrend, a long white can- dlestick is formed. The next day the market gaps higher on the open- ing, however, that is all that is remaining to the uptrend. The market drops to close well into the body of the white day, in fact, below its midpoint.
People who were bullish would certainly have to rethink their strategy with this type of action. Like the Piercing Line, a sig- nificant reversal of trend has occurred.
The first day should be a long day, with the second day opening significantly higher. This merely accentuates the reversal of sentiments in the market. Because of this, it would make the bearish Engulfing pattern a more bearish reversal signal than the Dark Cloud Cover.
Atmel 7. It is a long real body, which should reflect the previous trend. A downtrend should produce a black body, an uptrend, a white body Figures and The next day, prices gap in the direction of the trend, then close at the opening. This deterioration of the previous trend is immediate cause for concern. The clear message of the Doji Star is an excellent example of the value of the candlestick method of charting. If you were using close only or standard bar charts, the deterioration of the trend would not quite yet be apparent.
Candlesticks, however, show that the trend is abating because of the gap in real bodies by the Doji Star. The first day is a long day. The second day gaps in the direction of the previous trend. The second day is a Doji. The shadows on the Doji day should not be excessively long, especially in the bullish case. Scenarios and Psychology behind the Pattern Considering the bearish Doji Star, the market is in an uptrend and is further confirmed by a strong white day.
The next day gaps even higher, trades in a small range, and then closes at or near its open. This will erode almost all confidence from the previous rally. Many positions have been changed, which caused the Doji in the first place.
The first day should also reflect the trend with its body color. Pattern Breakdown The bullish Doji Star reduces to a long black candlestick, which does not support the bullishness of the pattern Figure The bearish Doji Star reduces to a long white candle line, which puts it in direct conflict with the pattern Figure These breakdown conflicts should not be ignored.
Disney Aetna Some literature refers to Meeting Lines as Counterattack Lines. Deaisen means lines that meet and gyaku- shusen means counteroffensive lines. The first day of this pat- tern is a long black candlestick Figure The next day opens sharply lower and puts the downtrend into a compromising position. The bullish Meeting Line is somewhat similar in concept to the bullish Piercing Line, with the difference being the amount the second day rebounds.
The bullish Meeting Line is not as significant as the Piercing Line. Also, do not confuse this with the On Neck Line covered in Chapter 4. The bearish Meeting Line Figure opens at a new high and then closes at the same close of the previous day, while the Dark Cloud cover drops to below the midpoint. The lines have bodies that extend the current trend. The second body is the opposite color. The close of each day is the same. Both days should be long days.
Scenarios and Psychology behind the Pattern Bullish Meeting Line The market has been in a downtrend when a long black day forms, which further perpetuates the trend. The next day opens with a gap down, then rallies throughout the day to close at the same close as the previous day. This fact shows how previous price benchmarks are used by traders: the odds are very good that a reversal has taken place.
If the third day opens higher, confirmation has been given. Pattern Flexibility The Meeting Line pattern should consist of two long lines. However, many times the second day is not nearly as long as the first day. It is also best if each day is a Closing Marubozu. Pattern Breakdown The Meeting Lines break down into single candle lines that offer no support for their case Figure and The single lines are similar to the first line in the pattern, with a shadow that extends in the direction of the second day.
Again, the breakdown neither con- firms the pattern nor indicates lack of support. One can also see the potential for these lines to become a Dark Cloud Cover or a Piercing Line, if there is any penetration of the first body by the second.
Gap Motorola A long black body occurs in a downtrend. Scenarios and Psychology behind the Pattern The market is in a downtrend, evidenced by a long black day. Depending upon the severity of the previous trend, this shows a deterioration and offers an opportu- nity to get out of the market. Pattern Flexibility Two-day patterns do not offer much flexibility. Confirmation would definitely be suggested.
Related Patterns The Harami is similar in its candle line relationship, but both of its days must be black. Schlumberger This pattern was created to provide a complementary pattern to the bull- ish Homing Pigeon.
A long white body develops in an uptrend. Both real bodies must be white. Scenarios and Psychology behind the Pattern The Descending Hawk pattern starts with a long white day. The mid- point of the range of the first day is above a period moving aver- age. This means that an uptrend has been in place. The long white day adds to the bullishness already present. The next day, prices open lower. Trading is somewhat confined this second day, and prices finally close up near their highs for the day.
Pattern Flexibility Both days of the Descending Hawk pattern must have long bodies. The body of a candlestick is the part between the open and the close. Do not confuse a long body requirement with a long day requirement. By definition, both days of the Descending Hawk pattern will have relatively short shadows.
It is recommended that confirmation be obtained. The second day of the Descending Hawk pattern is white, while the second day of the bearish Harami pattern is black. Juniper In fact, by removing the middle day in the Stick Sandwich pattern, you will get a Matching Low pattern.
A long black day continues the downtrend. The next day opens higher, but then closes at the same close of the previous day. This yields two black days together with their lower bodies close equal. This pattern indicates a bottom has been made, even though the new low was tested and there was no follow through, which is indicative of a good support price.
A long black day occurs. The second day is also a black day with its close equal to the close of the first day. Scenarios and Psychology behind the Pattern The market has been lower, as evidenced by another long black day. The next day, prices open higher, trade still higher, and then close at the same price as before. Apathetic bears are short the market, and quite comfort- able with their short positions.
If they ignore the Matching Low as a possible trend reversal, it will cause them much concern. An interesting concept is presented with this pattern. The psychol- ogy of the market is not necessarily with the action behind the daily trading, but with the fact that the trading closes at the same price on both days.
Pattern Flexibility The length of the bodies of the two days may be either long or short without affecting the meaning of the pattern. Pattern Breakdown The Matching Low pattern reduces to a long black line, which is usually bearish Figure Confirmation would be highly recommended. Figure Related Patterns The Matching Low closely resembles the Homing Pigeon pattern, but because the closes are equal, the second day does not quite fit the definition of being engulfed.
Papa Johns It was created to provide a complementary pattern for the Matching Low pattern. The first day is a long white day that occurs in an uptrend. The second day has the same closing price as the first day. Both days have little or no upper shadow. The dominant feature of this pattern is two white days with the same closing price.
As such, there has not been any consideration to giving the second day any length of day or length of body requirements apart from the little or no upper shadow requirement. This pattern indicates that a top has possibly been formed. Pattern Flexibility The first day of the Matching High pattern must have a long body. So, for example, if the first day closes at 20, the second day is permitted to close between Pattern Breakdown The Matching High pattern breaks down into a long white body with a lower shadow and therefore confirmation is required.
Cooper Tire 8. Some Japanese theory says that future movement will be in the direction of the longer side of the two candles, regardless of the price trend. The market direction is not as important with this pattern as it is with most other candle patterns. A Marubozu of one color is followed by a Marubozu of the opposite color.
A gap must occur between the two lines. Pattern Flexibility This allows no flexibility. If the gap does not exist, a Separating Lines continuation pattern will be formed. Pattern Breakdown The bullish Kicking pattern reduces to a long white candle line, which usually is bullish Figure The bearish Kicking pattern reduces to a long black candle line, which is usually bearish Figure General Motors Nordson The One White Soldier pattern is based on the Tasuki candlestick line.
The One White Soldier pattern starts with a long black day. This means that a downtrend has been in place.
The long black day adds to the bearishness already present. Emotionally, the downtrend has been damaged. Pattern Flexibility Both days are long days. A long day occurs when the high-low range is either 1 greater than 1.
Both days must have long bodies as well. The body of a candle- stick is the part between the open and the close.
Confirmation is required. Intel The One Black Crow pattern is based on the Tasuki candlestick line. The One Black Crow pattern starts with a long white day.
Emotionally, the uptrend has been damaged. Its name indicates that it foresees higher prices. It is made of a long black body fol- lowed by a small body that gaps lower Figure Because the Evening Star is a bearish pattern, it appears after, or dur- ing, an uptrend.
The first day is a long white body followed by a star Figure The third day gaps down and closes even lower, completing this pattern. Like the Morning Star, the Evening Star should have a gap between the first and second bodies and then another gap between the second and third bodies. Some literature does not refer to the sec- ond gap. The first day is always the color that was established by the ensuing trend. That is, an uptrend will yield a long white day for the first day of the Evening Star and a downtrend will yield a black first day of the Morning Star.
The second day, the star, is always gapped from the body of the first day. Its color is not important. The third day is always the opposite color of the first day. The first day, and most likely the third day, are considered long days. Scenarios and Psychology behind the Pattern Morning Star A downtrend has been in place, which is assisted by a long black can- dlestick.
There is little doubt about the downtrend continuing with this type of action. The next day prices gap lower on the open. This small body shows the beginning of indecision. The next day prices gap higher on the open and then close much higher. Pattern Flexibility Ideally there is one gap between the bodies of the first candlestick and the star, and a second gap between the bodies of the star and the third candlestick.
Some flexibility is possible in the gap between the star and the third day. Some literature likes to see the third day close more than halfway into the body of the first day. The Evening Star pattern reduces to a Shooting Star line, which is also a bearish line and in full support Figure Veritas Rockwell Automation Doji Stars are warnings that the prior trend is probably going to at least change.
The day after the Doji should confirm the impend- ing trend reversal. The Morning and Evening Doji star patterns do exactly this. Morning Doji Star A downtrending market is in place with a long black candlestick, which is followed by a Doji Star.
Just like the regular Morning Star, confirmation on the third day fully supports the reversal of trend. It is therefore considered more signif- icant than the regular Morning Star pattern.
The Evening Doji Star is more important because of this Doji. The Evening Doji has also been referred to as the Southern Cross. The second day must be a Doji Star a Doji that gaps. The third day is the opposite color of the first day. Scenarios and Psychology behind the Pattern The psychology behind these patterns is similar to those of the regu- lar Morning and Evening Star patterns, except that the Doji Star is more of a shock to the previous trend and, therefore, more signifi- cant.
The closer the breakdown is to the sin- gle Doji lines, the greater the support for the pattern, because the third day closes further into the body of the first day. It is the confirmation that is needed with the Doji Star and should not be ignored. OfficeMax Lucent This pattern is almost exactly the same as the Morning and Evening Doji Star pattern with one important exception.
Here, the shadows on the Doji must also gap below the shadows of the first and third days for the Abandoned baby bottom Figure The opposite is true for the Abandoned Baby top Figure , the Doji must completely including shadows gap above the surrounding days.
The Abandoned Baby is quite rare. The first day should reflect the prior trend. The third day gaps in the opposite direction with no shad- ows overlapping. Scenarios and Psychology behind the Pattern Like most of the three-day star patterns, the scenarios are similar.
The primary difference is that the star second day can reflect greater deterioration in the prior trend, depending on whether it gaps, is Doji, and so on. Pattern Flexibility Because of the specific parameters used to define this pattern, there is not much room for flexibility.
This is a special case of the Morning and Evening Doji Stars, in which the second day is similar to a tradi- tional island reversal day. The bullishness or bearishness is further ampli- fied because the long shadow is usually longer than in the previous cases.
This gap includes all shadows, not just the body. The third day gaps also, but in the opposite direction. Ashland It is made up of three Doji days with the middle Doji day being a star. This pattern is extremely rare, but when it occurs should not be ignored. All three days are Doji. The second day gaps above or below the first and third day. Scenarios and Psychology behind the Pattern The market has probably been in an uptrend or downtrend for a long time. The first Doji would cause considerable concern.
The second Doji would indicate that there was no direc- tion left in the market. And finally, the third Doji would put the final nail in the coffin of the trend. Because this indicates entirely too much indecision, everyone with any conviction would be re- versing positions. Pattern Flexibility Be careful with this one.
Because the Tri Star is so rare, you should probably be suspect of the data used in its calculation. If the middle Doji gap includes the shadows, it would be even more significant. Pattern Breakdown The Tri Star patterns break down into Spinning Tops, which are indicative of the market indecision Figure and This is somewhat of a conflict with the Tri Star pattern and supports the notion that because this pattern is so rare, it should be viewed with some skepticism.
Figure Figure Related Patterns Based on the previous discussions, you can see what a rare pattern this is. Hewlett-Packard Citrix As with most bearish rever- sal patterns, it begins with a white body candlestick.
The gap referred to in the name of this pattern is the gap between, not only the first and second days, but also the first and third days. The second and third days are black, which is where the two crows originate. The third day, even though closing lower than the second day, still is gapped above the first day.
Simply said, the second black day engulfs the first black day. An uptrend continues with a long white day. An upward gapping black day is formed after the white day. A second black day opens above the first black day and closes below the body of the first black day. Its body engulfs the first black day.
The close of the second black day is still above the close of the long white day. Scenarios and Psychology behind the Pattern Like the beginning of most bearish reversal patterns, a white body day occurs in an uptrend. The next day opens with a higher gap, fails to rally, and closes lower, forming a black day. This closing price, however, is still above the close of the white first day.
The bullishness is bound to subside. How can you have two successively lower closes and still be a raging bull? The fact that this is not exactly a bearish candle line suggests that some further confirmation is required before acting on this pattern. The Mat Hold is a bullish continuation pattern discussed in the next chapter. Also, the first two days of this pattern could become an Evening Star, depending upon what happens the third day. Colgate-Palmolive The downside gap refers to the gap between the white real body of the second day and the black real body of the first day.
The pattern begins with a long black day that occurs during a downtrend. The second day is a downward gapping white day. The third day is also a white day that opens below the bot- tom and then closes above the top of the previous white day. The midpoint of the range of the first day is below a period mov- ing average. The next day opens lower with a gap. Prices rise, however, and the day forms a white candlestick.
The bears are not shaken by this day because the close of the white day is still below the close of the first day. The strength and continuation of the downtrend has been put into question by these two consecutive white days. All three days must also have long bodies. Although the body of the second day may be relatively small, it is still a long body in relation to its high-low range.
For this pattern, it is strongly recommended that the third day close below the close of the first day. This leaves the gap created by the first and second days still unfilled. Con- firmation is definitely required. Baxter The trend is down and a long black real body is formed. The next day opens higher, trades at a new low, then closes near the high, producing a small black body. The third day opens lower, but not lower than the low that was made on the second day.
A small white body is formed on the third day, which closes below the close of the second day. The first day is a long black day. The second day is a Harami day, but the body is also black. The second day has a lower shadow that sets a new low. The third day is a short white day that is below the middle day. Scenarios and Psychology behind the Pattern A falling market produces a long black day. The next day opens higher, but the bearish strength causes a new low to be set.
This indecision and lack of stability is enforced when the third day opens lower. Stability arrives with a small white body on the third day. If, on the fourth day, price rises to new highs, a reversal of trend has been confirmed.
Pattern Flexibility Because this is such an unusual and precise pattern, there is not much flexibility. If the lower shadow on the second day were quite long, the greater potential for reversal would be more likely.
In some litera- ture, the second day resembles a Hammer line. Like many reversal patterns, if volume supports the reversal, the success is likely to be greater. The lower shadow must be at least twice as long as the body to be a Hammer, which in this case, is quite possible because of the long lower shadow on the sec- ond day.
Its appearance in Japanese literature is part of the Sakata Method see Chapter 5. FedEx It was created as the bearish counterpart to the Unique Three River Bottom pattern. Note: Because of the many definitional requirements of this pat- tern, it is an extremely rare pattern. The first day is a long white day that occurs during an uptrend. The next day opens lower, rallies to make a new high, but then trades down to close near the low of the day, thereby producing a small white body with a long upper shadow.
The third day opens higher, but not higher than the high that was made on the second day. A relatively small black body is formed on the third day, which closes above the close of the second day.
The midpoint of the range of the first day is above a period moving average. The next day opens lower, but the bullish strength causes a new high to be made. A substantial decline then ensues in which the strength of the bulls is called into question. This indecision and lack of stability is enforced when the third day opens higher. Stability arrives with a small black body on the third day.
If, on the fourth day, prices drop to new lows, a reversal of the trend has been confirmed. This is the same body size requirement as for the Shooting Star pattern. In fact, the second day will often resemble a Shooting Star line. This is does not fully support the bearish rever- sal and confirmation is suggested. Cendant It shows a series of long white candlesticks that progressively close at higher prices. This stair-step action is quite bullish and shows the downtrend has abruptly ended.
Three consecutive long white lines occur, each with a higher close. Each should open within the previous body. Each should close at or near the high for the day. Scenarios and Psychology behind the Pattern The Three White Soldiers pattern occurs in a downtrend and is rep- resentative of a strong reversal in the market. Each day opens lower but then closes to a new short-term high.
This type of price action is very bullish and should never be ignored. Keep in mind that when a day opens for trading, some selling has to exist to open below the previous close. This suggests that a healthy rise is always accompa- nied by some selling. This breakdown is in full support of the pattern, which makes confirmation unnecessary. Maxim Integrated 8.
Occurring during an uptrend, three long black days are stair-stepping downward. When this occurs three times, a clear message of trend reversal has been sent. Be careful that this downward progression does not get overextended. That would surely cause some bottom picking from the eternal bulls. Three consecutive long black days occur. Each day closes at a new low. Each day opens within the body of the previous day.
Each day closes at or neat its lows. Scenarios and Psychology behind the Pattern The market is either approaching a top or has been at a high level for some time. The next two days are accompanied by further ero- sion in prices caused by much selling and profit taking. This type of price actions has to take its toll on the bullish mentality.
This would accelerate the bearishness of this pattern. Guidant No confirmation is required. Three long black days are stair-stepping downward. Scenarios and Psychology behind the Pattern This pattern resembles a panic selling that should cause additional downside action. There is a total absence of buying power in this pattern.
Pattern Flexibility Because this pattern is a special version of the Three Black Crows pattern, flexibility is almost nonexistent. This pattern has been excluded from most of the statistical testing in later chapters. Texas Instruments However, it must occur in an uptrend, whereas the Three White Soldiers must occur in a downtrend.
Unlike the Three White Soldiers pattern, the second and third days of the Advanced Block pattern show weakness. This type of action after an uptrend and then for two days in a row should make any bullish market participants nervous, especially if the uptrend was getting overextended.
Remember that this pattern occurs in an uptrend. Most multiple- day patterns begin with a long day, which helps support the existing trend. The two days with long upper shadows show that there is profit taking because the rise is losing its power. Three white days occur with consecutively higher closes. A definite deterioration in the upward strength is evidenced by long upper shadows on the second and third days.
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