The Hindu Business Line : Trader's Corner

Certain candlestick patterns do not explicitly signal a trend reversal but only give an indication of whether the prevalent trend could halt or reverse. The bullish and bearish engulfing candlestick patterns belong to the former category while dark cloud cover (DCC) and piercing patterns fall in the later.

A DCC pattern is formed with two candles. The first candle is white and the second candle is black forming the ‘dark cloud’ that hovers ominously threatening the prevalent up-trend. Needless to add, the DCC pattern occurs near the top of an up trend.

The second candle in the DCC pattern gaps upward and then moves down, some way within the body of the first white candle but it does not cover the first candle entirely. If it did so, it would then get labelled as a bearish engulfing candle. The extent of penetration within the body of the first candle determines the strength of the pattern. When the second candle moves more that half-way within the body of the first candle, it implies that a trend reversal is imminent. Dark clouds (second black candle) that move less that half-way within the first candle can turn out to be a false alarm or minor halts within an up trend.

The piercing pattern is the inverse of the DCC pattern. While dark cloud covers occur towards the end of an up-trend, piercing patterns occur towards the end of a down trend and signal the possibility of a trend reversal from that juncture.

This pattern is made up of two candles as well. The first candle should be a long black candle as it would be part of the down trend. The second candle would gap downward and then move higher well within the body of the second candle. Again, the extent of the penetration determines the strength of the pattern.

A penetration that exceeds 50 per cent of the first candle’s body should be a more reliable signal of a trend reversal. — Lokeshwarri S. K.

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