Candle Patterns
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Bull Patterns
Engulfing Bullish = Bullish Reversal -
The Engulfing Bullish pattern is formed when a black candle is completely engulfed by a larger white candle after an extended down trend. In some cases, this pattern will form after a retracement of a bullish trend to begin another bullish rally.
The Engulfing Bullish pattern represents a complete reversal of a previous bearish trend. This type of pattern is a very common type of bottom reversal formation and is commonly found at the beginning of bullish rallies. Confirmation of this type of pattern would occur with a following session that is a white candle and closes higher with a higher high and low price.
A variation of the Engulfing Bullish pattern is the Last Engulfing Bullish pattern. This pattern looks similar to the example above and is found after an extended bullish trend. The Last Engulfing Bullish pattern represents the bulls final attempt to drive the market higher. If one is long and a Last Engulfing Bullish pattern forms, one should identify a protective stop level near the lows of the Last Engulfing Bullish pattern to protect any profit in the trade.
Candlestick Three River Morning Pattern Bullish Reversal -
The Three River Morning Star pattern formation occurs when a black candle is followed by a gapping star (any color), then followed by a white candle that is gapping above the star candle. This pattern formation represents a potential market bottom formation, and/or a buy signal. This pattern formation is unique because it not only identifies a potential market bottom, but it identifies a support level. The support is found at, or near, the low of the star candle.
The Three River Morning Star pattern is somewhat rare and can sometimes be found within a consolidating market. When the Three River Evening Star pattern is found after an extended bearish trend, it will often identify a potential market bottom. When the Three River Morning Star pattern is found within market consolidation, one should not expect the market to form a bottom and immediately rally. If the Three River Morning Star pattern is found within market consolidation and the Doji Star is well below the consolidation level, one should expect the support level to hold and the market to eventually rally.
This pattern will also be precluded by a Doji Star pattern formation. The Doji Star pattern will form prior to the completion of the Three River Morning Star pattern. Doji Star patterns are typically found at, or near, market tops or bottoms. Although, sometimes a Doji Star pattern can form within a trend as the market attempts to break above or below a previous support or resistance level.
The story behind the Three River patterns is as follows:
In Japan, there were three rice farmers on three separate rice farms, all separated by a river which joined between their farms. One day, the farmers began fighting for control of each others land to grow more rice. The battle continued for many days until one farmer managed to takeover one of the other farmers rice fields. The farmer who gained control of two rice farms had the obvious advantage and finally took over the last rice farm.
The Piercing Line pattern is formed when a black candle is followed by a white candle that opens below the close of the previous black candle and closes above the mid-point of the black candles body. It is the reverse and inverse of the Dark Cloud Cover pattern.The Piercing Line pattern is not very common. It represents a potential bullish market reversal. Conservative traders should wait for confirmation of this pattern. Confirmation of any bullish pattern occurs when the bullish pattern is followed by a white candle with a higher close, higher high and higher low. Much like the Dark Cloud Cover pattern, the Piercing Line pattern can form within a down-trend as the market breathes. This is why confirmation of the Piercing Line pattern is important for investors and why investors should attempt to gauge the markets conditions before acting on this pattern formation.
Bear Patterns
Candlestick Dark Cloud Cover Patterns
The Dark Cloud Cover pattern is a good indicator of potential bearish market reversals. Often the Dark Cloud Cover pattern will form at the exact high (end) of a bullish trend. Conservative investors should also wait for confirmation of this pattern formation. Confirmation of any bearish pattern occurs when a bearish pattern is followed by a black candle with a lower close, lower high and lower low price.
Notice: Sometimes, by the time the confirmation candle is formed, the majority of the bearish trend has occurred. By this I am attempting to inform investors that sometimes as aggressive short position after a Dark Cloud Cover pattern has formed will result in good profits by the time the confirmation candle forms. Aggressive investors should always use a protective stop level to protect against unwanted losses. An appropriate protective stop level for the Dark Cloud Cover pattern would be at, or near, the highs of the Dark Cloud Cover pattern.
Engulfing Bearish = Bearish Reversal -
The Engulfing Bearish pattern is the reverse of the Engulfing Bullish pattern. It is formed when a white candle is completely engulfed by a larger black candle after an extended up trend. The Engulfing Bearish pattern is commonly found at market tops and at the beginning of a bearish price decline.
Again, a variation of this pattern is called the Last Engulfing Bearish pattern. This variation is commonly found after an extended down trend and represents the bears final attempt to drive the market price lower. If one is short and a Last Engulfing Bearish pattern forms, one should identify a protective stop level near the highs of the Last Engulfing Bearish pattern to protect any profit in the trade.
Western traders call this type of pattern an Outside Day because the current sessions range completely engulfed the previous sessions range.
The Engulfing Bullish and Engulfing Bearish patterns can also be found at corrections in a long-term market trend. When the market attempts to breathe by correcting from its original trend before resuming the original trend, often an Engulfing pattern will form. Investors should be aware of this formation because the market may not correct far enough for any profits to result in the trade. Investors should use a protective stop level to protect against such unwanted losses.
Candlestick Three River Evening Pattern
The Three River Evening Star pattern formation occurs when a white candle is followed by a gapping star (any color), then followed by a black candle that is gapping below the star candle. This pattern formation represents a potential market top formation, and/or a sell signal. This pattern formation is unique because it not only identifies a potential market top, but it identifies a resistance level. The resistance is found at, or near, the high of the star candle.
The Three River Evening Star pattern is somewhat rare and can sometimes be found within a consolidating market. When the Three River Evening Star pattern is found after an extended bullish trend, it will often identify a potential market top. When the Three River Evening Star pattern is found within market consolidation, one should not expect the market to form a top and immediately sell-off. If the Three River Evening Star pattern is found within market consolidation and the Doji Star is well above the consolidation level, one should expect the resistance level to hold and the market to eventually sell-off.
This pattern will also be precluded by a Doji Star pattern formation. The Doji Star pattern will form prior to the completion of the Three River Evening Star pattern. Doji Star patterns are typically found at, or near, market tops or bottoms. Although, sometimes a Doji Star pattern can form within a trend as the market attempts to break above or below a previous support or resistance level.
The story behind the Three River patterns is as follows:
In Japan, there were three rice farmers on three separate rice farms, all separated by a river which joined between their farms. One day, the farmers began fighting for control of each others land to grow more rice. The battle continued for many days until one farmer managed to takeover one of the other farmers rice fields. The farmer who gained control of two rice farms had the obvious advantage and finally took over the last rice farm.
Gary S. Wagner - Executive Producer