What are Dark Cloud Cover Candlestick Pattern?
It is a reversal candlestick pattern which is bearish in nature and appears at the end of an up trend. It is a complex pattern made of two candlelines. The first candle is bullish in nature and the second is bearish in nature.
It has its name because of its resemblance to a cloud covering an hillock. Dark denotes the underlying pessimism. It is one of the important pattern, when it appears you should not ignore it .
This pattern is formed by the combination of two candlesticks. The first one is a trending white candle and the second is the reversal black candlestick.
The market is in an up trend. The price opens at almost low of the day and as usual the buyers are confident and continue to buy. At the end of the session the price closes at almost top for the time period. This results in the formation of bullish white candle.
On the next day or next time period the price opens above the high of the previous bullish candlestick. New buyers are enthusiastic. Old buyers are adding to their position. But the smart money starts selling to these ignorant buyers. As the supply increases the momentum decreases and the prices starts falling. As the prices falls the bulls are happy to buy more thinking that it is a value buy. This facilitates bears to sell at higher level.
The supply continues to increase more than the demand, pulling the price down. As the new buyers are in loss, they also start selling to cover their long positions. The old buyers starts booking profits by selling their positions. As the bears continue to increase their short position, the price falls further and at the end of the session the price closes below the opening. This results in the formation of bearish black candlestick.
The dark cloud cover signal becomes valid if the close has penetrated well in to the previous white candle's real body.
It is obvious that the sellers took over the control of the market. It signifies that the top reversal of the up trend is impending.
More the penetration of the second day's close into the range of the previous day's white real body, more the bearishness of the market. Some technicians insist that the penetration of second day's close should be at least 50% into the range of the previous day's white real body.
The significance of this pattern increases if the second day's opening is above a resistance area and the close is below the resistance area. If the second candle is a black marubozu or with a shaven head or shaven bottom, it speaks of the more bearishness of the market. Its importance is even more if it is accompanied by increased volume.
If you are holding a long position, this pattern should alert you to take action the next day. One can cover her long position below the low of the second day's black candle.
A short trade can be entered below the low of the second day's black candle. Place a buy on stop order above the high of the pattern to limit your loss, in case the up trend continues to go up.
Dark Cloud Cover Candlestick pattern may occur along an uptrend without a reversal. It only exhibits a minor profit booking.
Counter part of this Dark Cloud Cover Candlestick pattern is bullish reversal pattern called Piercing Candlestick Pattern.
Read and learn about it by clicking on the link below.
There are many more complex candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed below to learn and understand more about them.
Piercing Pattern is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Bullish Engulfing Pattern is a major bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Bearish Engulfing Pattern is a major bearish reversal candlesticks pattern. They occur at the top of an up trend.
Morning Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Evening Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
Morning Doji Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Evening Doji Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
Three White Soldiers is a candlesticks pattern formed by a group of three white candles, which shows the strength of the advancing market.
Three Black Crows is a candlesticks pattern formed by a group of three black candles, which shows the strength of the declining market.
Harami is a candlesticks pattern, which shows the indecision of the market. In Japanese language, it means, pregnant. It is made of two candles, one containing the other.
Gaps are continuation chart pattern, formed by an unfilled space between two trading session. Gaps are referred as Tasuki, meaning window in candlestick charting.
Island Formation is a reversal chart pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
Abandoned Baby is a reversal chart pattern, formed by price action in a single time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.