As important as it is to identify stocks that are headed higher, it’s equally important to be able to identify when a stock might start to drop. Technical analysts use a number of different chart patterns to identify bearish reversals, the point at which a stock transitions from a bullish trend to a bearish trend. Here’s a look at some of the most popular bearish reversal patterns on candlestick stock charts.
The shooting star formation is also called the gravestone doji because it has the appearance of a tombstone and it often means a bullish rally is dead. A shooting star pattern occurs when a stock opens at a new high, trades considerably higher throughout the day and then sells off into the close to finish the day at or near its opening price. The trading action suggests the stock was unable to find enough buyers at the higher prices during mid-day and traders began taking profits into the close.
A bearish engulfing pattern is formed when a smaller white candle is followed by a large black candle that completely engulfs the smaller candle. In other words, the stock opens at a higher price than the previous day’s close, and closes at a lower price than the previous day’s open. The pattern is indicative of an optimistic higher opening price that is immediately met with heavy selling throughout the day.
The bearish harami pattern forms when a large white candlestick is followed by a smaller black candlestick that fits entirely inside the vertical range of the previous candle. The harami is an indication that there wasn’t even enough buying pressure in the market to revisit the previous day’s closing price, an indication that there is more selling pressure in the market than buying pressure in the near-term.
The bearish evening star pattern is a series of three candles that often signals at least a short-term top. The pattern is made up of a white candlestick followed by a short shooting-star-like candle that gaps up from the previous day’s close. The third candle in the pattern is a large black candle indicating strong selling pressure. The large white candle shows bullish conviction among traders, the short star-like candle demonstrates indecision, and the large black candle demonstrates a decisive turn from bullish to bearish action.
The dark cloud cover pattern consists of a large white candle followed by a large black candle that exhibits both a higher opening price than the previous day’s close and a higher closing price than the previous day’s open. A true dark cloud candle should close below the midpoint of the previous day’s white candle. While this pattern often signals a bearish reversal, it’s important to watch for a lower opening price on the third day for confirmation.
One black crow is similar to the hamari, except the black candlestick extends below the previous day’s opening price. A one black crow pattern forms when a stock opens lower than the previous day’s high and trades lower throughout the day until it closes outside of the previous day’s trading range. The second candle indicates that even at lower prices, the stock is being met with heavy selling pressure.
Note: All images come from here: http://www.candlesticker.com/BearishPatterns.aspx?lang=en
This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author.