BEARISH DARK CLOUD COVER
Definition
This is a top reversal pattern comprising two candlesticks. During an uptrend, a white candlestick appears on the first day. On the second day, the market opens at a new high, creating a gap up, and then closes more than halfway into the prior bullish candlestick’s body, resulting in the formation of a strong black candlestick.
Recognition Criteria
1. The market is currently defined by a dominant upward trend.
2. A white candlestick appears on the first day.
3. A black candlestick opens on the second day with a gap up and closes more than halfway into the body of the first day’s bullish candlestick.
4. On the second day, the market does not close below the body of the first day’s candlestick.
Pattern Requirements and Flexibility
The first day of the Bearish Dark Cloud Cover pattern features a normal or long white candlestick. The second day should open significantly above the first day’s close and close more than halfway into the prior bullish candlestick’s body. However, the second day’s close must remain within the body of the first day’s candlestick.
Trader’s Behavior
The market moves in an uptrend. The first white body reinforces this view. The next day the market opens higher via a gap, showing that the bullishness still persists. After this very bullish open, bears decide to take the lead. The market plunges toward the close, prices start to go down resulting in a close way below the previous day’s close. Now the bulls are losing their confidence and are reevaluating their long positions. The potential short sellers start thinking that new highs may not hold and perhaps it is time to take short positions.
Sell/Stop-Loss Levels
The confirmation level is determined by the last close. For confirmation, prices should fall below this level.
The stop-loss level is defined as the last high. If, following the bearish signal, prices rise instead of falling and either close or make two consecutive daily highs above the stop-loss level, without detecting any bullish pattern, the stop-loss is triggered.