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Technical Classroom: How to read Piercing Line and Dark Cloud Cover candlestick patterns

Technical Classroom: How to read Piercing Line and Dark Cloud Cover candlestick patterns
October 08
01:28 2018

Chandan Taparia

Motilal Oswal Financial Services

Piercing Line and Dark Cloud Coverare two-day reversal patterns. The pattern is a bearish or bullish reversal if it appears at the end of a downtrend or an uptrend.

Any other indicator, oscillator and price chart pattern with these formations (Piercing Line and Dark Cloud Cover) make it high probable to trade. These are the reversal two candles set up which gives an early sign of change in an ongoing trend.

1. Piercing Line (bullish pattern)

The piercing pattern is a bullish trend reversal or bottom reversal pattern that appears towards the end of a downtrend. However, the presence of an existing downtrend is needed.

The first candlestick must be a dark or Red candlestick with a large real body and the second candlestick should be light in colour/Green or Blue and should be below the low of the previous candlestick.

The second candlestick must close above the middle of the real body of the first candlestick with the deeper it pierces the first candlestick the more significant the pattern becomes.

In nutshell, Piercing Line is an early sign that bulls are in charge and decline is being bought.

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2. Dark Cloud Cover (bearish pattern)

It is a bearish or top reversal pattern that appears in an uptrend and signals a potential weakness in the uptrend.

It is a bearish trend reversal pattern and the Dark Cloud Cover pattern is only valid if it appears in an uptrend. The first candlestick in this pattern must be a light or Green/Blue candlestick with a large real body.

The following candlestick should be a dark or Red candlestick that opens above the high of the first candlestick but closes well into the real body of the first candlestick, signalling a change in sentiment.

The pattern is more reliable if the second candlestick closes below the middle of the first candlestick. Deeper the penetration of the second candlestick, the more important it becomes.

In nutshell, Dark Cloud Cover is an early sign of decline as the cloud of weakness has started and bears are in charge. This suggests that the bounce is being sold.

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Disclaimer: The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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