Dark Cloud Cover

Dark Cloud Cover

The pattern above is a Japanese candlesticks pattern and is a bearish reversal pattern composed of a green (or white) body followed by a red (or black) body. It is the opposite of the candlestick piercing pattern which is a bullish reversal pattern. This pattern occurs at the end of an uptrend whereas the piercing pattern occurs at the end of a downtrend. In order to qualify as a dark cloud cover, four conditions must be met. First, there is a green (or white) body followed by a red (or black) body. Second, the red body passes the midpoint of the prior green body of the previous day. In other words, the second day of the signal should be a red candle opening above the high of the previous day and closing more than halfway into the body of the previous day’s green candle. Third, the stock must have been in a definite uptrend, as stated above, before this signal can occur. Fourth, the following day’s price must continue to drop and close lower in order to provide confirmation of this pattern.

What does this reversal pattern indicate is happening in the markets?
This pattern indicates that the bulls were in control during the uptrend where they gapped the price up, but they lost confidence and the bears stepped in to close prices near the low of the day. The bulls were unable to maintain the upward momentum and are therefore less likely to buy stock at higher price levels. It appears that the uptrend has stopped and the bears increase their sales at the lower share price. If the bears can hold control the day after the dark cloud cover appears, then the probabilities of a reversal are very high.

When witnessing this bearish reversal pattern it is important to note a few things. The higher the gap up from the previous day’s close, the more prominent the reversal because the market was unable to sustain the high price level. Also, the longer the green candle and the red candle the stronger the reversal, and the lower the red candle closes into the green candle, the stronger the reversal as well. Additionally, if the volume is high during both days, then the pattern is considered to be more valid. Traders must be careful that they don’t mistake a bearish engulfing pattern for this pattern. If the dark cloud cover were to close lower (below the open of the previous day), it becomes a bearish engulfing pattern, which has slightly stronger bearish connotations.

There are many more signals in addition to this important reversal pattern including the bullish engulfing pattern, the candlestick hammer signal, the inverted hammer candlestick and the hanging man candle. You should begin by studying the doji candlestick chart first and then continue to learn about the other signals utilized in candlestick analysis. Learn how to increase your profit though candlestick trading online and join me in my 2-Day Trading for Profits Online Training Clinic.

Continue your Japanese Candlestick education and read about the bullish harami candle.