Dark Cloud Cover

figure 14.18 A Dark Cloud Cover Formation.

Description:

■ The dark cloud cover is a double candlestick reversal pattern. See Figure 14.18.
■ The second bearish candlestick gaps up above the high of the first candlestick
and subsequently reverses back down to at least midway or more of the first
candlestick.
■ A longer second bearish candlestick is indicative of greater bearishness.
■ It is best found in a protracted uptrend that is beginning to display weakness.
■ Its corresponding bullish version is the piercing line.

Psychology:

■ The dark cloud cover depicts buyers driving prices higher aggressively. Prices
eventually gap up, indicating that the buyers may have the upper hand. The
sellers subsequently resume control and drive prices back down to below the
midpoint of the first candlestick. This essentially puts the bears in control.

Trigger, Stoploss, and Confirmation:

■ The trigger is at the low of the first candlestick.

■ To confirm the reversal, price needs to close below the trigger level.
■ The stoploss is placed at the high of the second candlestick.
■ A buystop entry order may be placed at the high of the second candlestick
only if there is evidence that the trend is still in effect.
figure 14.19 Dark Could Cover on the Daily Chart of Icahn Enterprises.
Source: MetaTrader 4

See Figure 14.19. The intraday penetration of the trigger level is not considered
a valid confirmation of the reversal pattern.

Tweezers top

figure 14.20 A Tweezers Top Formation.

Description:

■ The tweezers top is a double candlestick reversal pattern. See Figure 14.20.
■ Both candlesticks share the same high (it is this double test of the same high
that is the most important characteristic of this pattern).
■ Longer upper shadows or real bodies are indicative of greater bearishness.
 ■ The colors of the real bodies are not significant in this case as it is the price
rejection level that is of interest.
■ It is best found in a protracted uptrend that is beginning to display weakness.
■ Its corresponding bullish version is the tweezers bottom.

Psychology:

■ The tweezers top depicts a clear and distinct level of supply in the market.
Price is rejected twice at the same level, indicating that the sellers are very
determined to keep prices from being driven above that level. This obvious
inability to breach the high of the candlesticks induces a state of uncertainty
among the buyers who finally retreat, losing confidence in the market. The
bears are in control.
Trigger, Stoploss, and Confirmation:

■ The trigger is at the low of the pattern.

■ To confirm the reversal, price needs to close below the trigger level.
■ If both candlesticks share the same low, then refer to the midway or low of
the candlestick that precedes the double candlestick pattern as a possible level
for a trigger.
■ The stoploss is placed at the high of the pattern.
■ A buystop entry order may be placed at the high of the second candlestick
only if there is evidence that the trend is still in effect.

See Figure 14.21. The tweezers’ double intraday penetration of the uptrend
line indicates potential exhaustion in the uptrend. The pattern was finally con-
firmed by the penetration candlestick that closed below the trigger level. Price

figure 14.21 An Overextended Tweezers Top on the 15‐min Chart of EURUSD.

Source: MetaTrader 4
figure 14.22 Tweezers and Double Top on the 30‐Min Chart of EURUSD.
Source: MetaTrader 4

subsequently declined rapidly. Notice too, at the bottom right‐hand side of the
chart that another tweezers top pattern was formed, but it is not located at the
end of an uptrend, and hence unreliable. It was not confirmed by price. The over-
extended hammer was also not confirmed by price, but would have if the trigger
was set to the midpoint of the preceding candlestick.
Figure 14.22 shows a tweezers top being subsequently retested, creating a
double top in the process.

Bearish
engulfing

figure 14.23 A Bearish Engulfing Formation.

 Description:

■ The bearish engulfing formation is a double candlestick reversal pattern. See

Figure 14.23.
■ The first candlestick should be a bullish candlestick followed by a larger
bearish candlestick. The second candlestick gaps up above the close of the first
candlestick and subsequently reverses back down and closes below the low of
the first candlestick.
■ The upper and lower shadows are not significant.
■ It is best found in a protracted uptrend that is beginning to display weakness.
■ Its corresponding bullish version is the bullish engulfing.

Psychology:

■ The bearish engulfing formation is extremely bearish. It depicts a clear turn-

around in bullish price action after gapping up aggressively. The sellers drive
prices all the way down to below the low of the first candlestick, and make it
very clear that the bears are now in control.

Trigger, Stoploss, and Confirmation:

■ The trigger is at the low of the second candlestick.
■ To confirm the reversal, price needs to close below the trigger level.
■ The stoploss is placed at the high of the second candlestick or pattern.
■ A buystop entry order may be placed at the high of the second candlestick
only if there is evidence that the trend is still in effect.

See Figure 14.24.

figure 14.24 Bearish Engulfing on the Daily Chart of Gildan Activewear Inc.
Courtesy of Stockcharts.com
Evening star

figure 14.25 An Evening Star Formation.

Description:

■ The evening star formation is a triple candlestick reversal pattern. See Figure
14.25.
■ The first candlestick should be a strong bullish candlestick followed by a small‐

bodied candlestick like a spinning top gapping up above the first candlestick.
The third candlestick gaps down below the second candlestick and is bearish.
■ The upper and lower shadows are not significant.

■ It is best found in a protracted uptrend that is beginning to display weakness.

■ Its corresponding bullish version is the morning star formation.

Psychology:
■ The evening star formation begins as a bullish candlestick where buyers ag-
gressively drive the price up. The price gaps up but halts, indicating that the
sellers are now putting a cap on prices. The buyers begin to lose confidence
and start to retreat. The sellers subsequently drive prices down, showing that
the bears are now in control.
Trigger, Stoploss, and Confirmation:
■ The trigger is at the low of the first candlestick.
■ To confirm the reversal, price needs to close below the trigger level.
■ The stoploss is placed at the high of the second candlestick or pattern.
■ A buystop entry order may be placed at the high of the second candlestick
only if there is evidence that the trend is still in effect.

See Figure 14.26.

figure 14.26 An Evening Star Formation on the Daily Chart of WuXi Pharma Tech Inc.
Courtesy of Stockcharts.com

Bearish harami

figure 14.27 A Bearish Harami Formation.

Description:

■ The bearish Harami formation is a double candlestick reversal pattern. See

Figure 14.27.
■ The first candlestick may be either a strong bullish or bearish candlestick fol-
lowed by a small‐bodied candlestick like a spinning top gapping into the range
figure 14.28 Bearish Harami on the Daily Chart of Illinois Toll Works Inc.
Courtesy of Stockcharts.com

of the first candlestick. The second small‐bodied candlestick can be of any

color as well.
■ The upper and lower shadows are not significant.
■ It is best found in a protracted uptrend that is beginning to display weakness.
■ Its corresponding bullish version is the bullish Harami formation.

Psychology:

■ The bearish Harami formation begins as either a bullish or bearish candle-

stick. The price suddenly gaps into the range of the first candlestick and halts,
indicating that the sellers are now at play in the existing uptrend. Eventually
the sellers take over by driving price down below the low of the first candle-
stick, showing that the bears are now in control.

Trigger, Stoploss, and Confirmation:

■ The trigger is at the low of the first candlestick.

■ To confirm the reversal, price needs to close below this trigger level.
■ The stoploss is placed at the high of the first candlestick or pattern.
■ A buystop entry order may be placed at the high of the candlestick pattern
only if there is evidence that the uptrend is still in effect.

See Figure 14.28.

Three black Crows

figure 14.29 A Three Black Crow Formation.

Description:

■ The three black crows formation is a triple candlestick reversal pattern. See
Figure 14.29.
■ All three candlesticks are bearish and their real bodies should overlap (otherwise
it would be called three identical crows). The three real bodies should close
with successively lower lows.
■ The upper and lower shadows are not significant.
■ The color of the three candlesticks is highly significant.
■ It is best found in a protracted uptrend that is beginning to display weakness.
■ Its corresponding bullish version is the three white soldiers formation.

Psychology:

■ The three black crows formation is found at the top of a bullish trend where
the buyers were initially in control. Then the sellers begin to drive the prices
down with the appearance of the first strong bearish candle. The buyers try
to resume control, evidenced by the upside opening gap in the second candle-
stick. But the sellers drive prices down further. The process is repeated one last
time before the buyers retreat, relinquishing whatever control they had left in
the market. The bears are now in control.

Trigger, Stoploss, and Confirmation:

■ The trigger is at the low of the second bearish candlestick.

■ To confirm the reversal, the third candlestick needs to close below this trigger level.
■ The stoploss is placed at the high of the first bearish candlestick or pattern.
■ A buystop entry order may be placed at the high of the candlestick pattern
only if there is evidence that the trend is still in effect.