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Candlestick Reversal Tops
Candlesticks with similar appearances can signal much different
outcomes, depending on whether the individual candle or candlestick
formation occurs after an extended downtrend or uptrend or in the
middle of a trend. Here are some candlestick signals at tops that
suggest the previous uptrend may be ready to reverse into a bearish
downtrend.
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Hanging Man
The hanging man is a bearish
reversal pattern occurring within an established uptrend. It has a
small real body (white or black) at or near the high; therefore, it
has little or no upper shadow. Although the color of the real body
is not critical, black is more bearish than white. Also, it has a
long lower shadow, like legs dangling down from the body. The
hanging man's small real body implies the previous uptrend is losing
momentum. The next period’s action would confirm the bearish
implications of the hanging man if there is a downward window (gap)
or a long black candlestick. |
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Bearish Engulfing Pattern
The bearish engulfing pattern is defined as a current
large real body enveloping a smaller white real body formed
by price action during the previous period. Supply overwhelms
demand. The bulls are immobilized. |
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Dark Cloud Cover
The dark cloud cover is a decisive
black candlestick following a strong white candlestick with an
opening gap up to a new high, a reversal and weak close well into
the previous white real body. The weaker the second black
candlestick’s close, the more meaningful and bearish it is. For
example, a close near the low of the current black candlestick and
below the midpoint (or lower) of the previous white real body would
be significant. This candlestick indicates bulls led a charge up the
mountain to new price highs but could not hold the ground. Now the
bears are pushing them back down the mountain. Dark cloud cover is
the opposite of the piercing line. |
Stars
Stars are reversal patterns. There are four main bearish
stars that follow and reverse an uptrend.
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The shooting star has a long
upper shadow, a small real body at the lower end of the price range
and little or no lower shadow. After an upward move in previous
sessions, a strong rally from the open occurs, but the market
rejects the high prices and prices collapse back down to close near
the open. This means that after early buying enthusiasm on the open,
the rally attempt proved unsustainable, an obvious failure of
demand. It is more significant if the current open gaps up from the
previous real body. |
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More significant is the more
complex evening star, which comprises three candlesticks:
First, a long white candle; second, a gap-higher open and a small
real body (black or white), which should be completely above but not
touching the real body of the first candle; and third, a black real
body that closes well into the white body of the first candlestick.
The longer this third black real body, the more meaningful it is. A
volume surge on this third black real body would add power to the
reversal signal. |
If the middle candle is a doji, the
pattern is called an evening doji star, which is more
significant than an ordinary evening star.
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If the middle doji’s shadows are
completely above and do not touch the shadows of the first and third
candlesticks, the pattern is called an abandoned baby top and
is even more significant.
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Tri-Star
is a rare but significant reversal pattern formed by three
dojis, the middle one a doji star that gaps up and away from
the previous period’s candlestick. Tri-star often follows a
trend of long duration that has run its course. The
three dojis clearly indicate a loss of momentum and an
exhaustion of the trend.
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Bearish Harami
The bearish harami is a reversal
pattern following an uptrend, formed a long white real body during
the previous period and a short black real body during the current
period where the current close is relatively near the open, and both
close and open are contained completely within the previous period’s
long white real body. There should be immediate downside
follow-through in the next period for confirmation. |
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Bearish harami cross
is a major reversal pattern. In an uptrend, a long white real body
is followed by a doji, and that doji is contained within the
previous large white body. |
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Two Crows
Two crows reverse an existing
uptrend. First, there appears a relatively small black candlestick
that signals a loss of upside momentum. That small black candlestick
is immediately followed by a much more substantial black
candlestick, which confirms a bearish change in momentum.
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Three Black Crows
Three black crows more decisively
reverse an existing uptrend. Look for three relatively large,
consecutive black candlesticks that close near or at their lows of
the period. If the three candlesticks are identical, the pattern is
called identical three black crows. |
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Belt Hold
Belt hold, in an uptrend, forms
when prices open much higher on a large window (gap) but close
substantially lower, giving up most of the early gain. |
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Bearish Counterattack Line
In an uptrending market, a large
white candlestick is following by a large black candlestick that
opens on a big gap higher and then slumps back during the period to
close at the same price as the previous close. The bearish black
candlestick needs followup action to the downside to confirm the
turn to a downtrend.
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Three Inside Down
Three inside down is composed of
three candles. Following a prevailing uptrend, first look for a
large white candlestick. This is followed by a short black
candlestick, which is entirely contained within the real body of the
previous big white candlestick. This suggests some loss of upward
price momentum. The third candlestick is a large black candlestick
that closes below the lows of the previous two candlesticks, thus
confirming a bearish change in trend direction.
Three Outside Down
Three outside down is also composed
of three candlesticks. Following a prevailing uptrend, first look
for a white candlestick. This is followed by a larger black
candlestick, which is an engulfing line – that is, its real body
contains the entire previous period’s price range. This alone
suggests a change in upward price momentum. The third candlestick
is a large black candlestick that closes below the lows of the
previous two candlesticks, thus confirming a bearish change in trend
direction.
Kicking
Kicking can also be a two-day bull
trap. Following a decisive day of buying where prices open on their
lows and close on their highs, thus forming a substantial white
candle with no shadows, the very next day prices totally reverse on
the open, forming a falling window on a large downside opening price
gap. Prices close that day on their lows, forming a substantial
black candle with no shadows. The bulls can’t help but suffer big
losses, and they are likely to be punished by further price weakness
in the days ahead, with the market showing no mercy. The bulls
suffer a severe kicking.
Deliberation
Deliberation occurs in an uptrend
with a three white candlestick pattern where the first two are
substantial but the third is small. This indicates a loss of upward
momentum, as if the market is preparing for a trend change from up
to down.
Advance Block
Advance block occurs in an uptrend
when there are three consecutive white candlesticks with the second
and the third both exhibiting a smaller price range and real body
than the previous one, thus indicating diminishing upward price
momentum.
Ladder Top
Ladder top reverses a bullish
uptrend. After three consecutive and decisive buying sessions
forming three substantial white candlesticks, there may be a
noticeable slowing of upward momentum in the fourth period. The
trend change from bull to bear is confirmed in the fifth period by a
relatively large black candlestick that closes on its low and at a
new low relative to the most recent past three periods.
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Tweezer Tops
Tweezer tops are two or more
candlesticks with matching tops. The tops do not have to be
consecutive, and size and color are irrelevant. It is a minor
reversal signal that becomes more important when part of a larger
pattern. A sell signal is confirmed when the price falls below the
intervening two minor pullback lows, preferably on a large black
candlestick or a falling window (breakaway gap) and a rise in
trading volume to indicate serious selling. |
Source: VantagePoint Intermarket
Analysis Software
Three Buddha Top
Three Buddha top is a longer-term
pattern similar to a Western head-and-shoulders top. A sell signal
is confirmed when the price falls below the intervening two minor
pullback lows, preferably on a large black candlestick or a falling
window (breakaway gap) and a rise in trading volume to indicate
serious selling.
Three Mountains Top
Three mountains top is a
longer-term pattern similar to a Western triple top. A sell signal
is confirmed when the price falls below the intervening two minor
pullback lows, preferably on a large black candlestick or a falling
window (breakaway gap) and a rise in trading volume to indicate
serious selling.
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Dumping Top
Dumping top is a longer-term
pattern similar to a Western rounding top, where a sell signal is
validated by a falling window (breakaway gap) to indicate
overwhelming supply. |
Eight New Price Lines
Eight new price
lines is a chart pattern consisting of eight new price highs. This
implies an overbought market where profit-taking would be
appropriate.
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Candlestick Chart Basics
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Indecision and Continuation
Candlesticks
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Candlestick Reversal Bottoms
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Candlestick Reversal Tops
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Quick Guide to Main Patterns
Main Trading
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