Bearish Reversal Candlestick Patterns

Evening Star, Evening Doji Star

Evening Stars start with a continuation of the bullish move. The second day sees a continuation of the move up, but a sell-off makes the market close at or near the open for the day. The first two candles meekly suggest a loss of bullish momentum. In fact up to day two this formation matches the Bearish Shooting Star weak-to-moderate strength reversal pattern. Although the example above is a blue shooting star, the shooting star can really be any color. Bearish Shooting Stars alone are decent signals for additional sell-offs on day three. Since the certainty for a shooting star indicator is low, the trend reversal should be confirmed by a red candlestick the next day. Thus Bearish Evening Stars require on day three a sharp sell-off after the market open. Analysts want day threes high to be near equal to its open price, suggesting the market sell-off has no uncertainty in the new direction.

Three Inside Down

 Following an uptrend, a long blue day occurs

• The second day is a red day where the body is engulfed by the body of the first

• The third day is a red candle with a lower close than the previous day

During an uptrend a large upward price movement occurs, illustrated by a long blue candlestick. The price is then driven down, as shown by a red candlestick, reversing some of the upward movement from the previous day. The reversal pattern is confirmed with the third days red candle completes the bearish pattern.

This pattern is a confirmation of the Harami pattern.

Dark Cloud Cover

 The first day is a long blue day • The second day will close below the midpoint of the previous candles body. The market continues the uptrend on the first day. By day two sellers take price down to close near the open of the previous day. In FX, traders view the higher the second day high the better since the bigger the rally after the open, the more sellers were able to drive price back down. This formation suggests short sellers have begun to take charge of the market, and longs have been shaken by the sudden lost of bullish momentum. Declining days are common after this formation as more short sellers confidently to enter the market with a clear stop benchmark at the second day high.

Three Outside Down
• After an established uptrend a clear bearish Engulfing pattern occurs (one blue candle and a second bear move that drives price below the prior day low and closes near the bottom of the range)

• The third day is a red day with an even lower close than the second day

In a market characterized by uptrend, day-twos red candle close completely below day-one, engulfing it completely. The first two days are a classic pattern that suggests a sell-off has taken over the market and is breaking the established trend. This bearish reversal is confirmed by a still lower day on day-three. • Connections to Bearish Engulfing PatternThe Bearish Three Outside Down pattern is just a continuation for Bearish Engulfing with the third day as confirmation for trend reversal. A Bearish Engulfing pattern by itself is a moderately reliable reversal signal, but when it is followed by a red day (forming the Bearish Three Outside Down), the pattern becomes much more reliable.

Abandoned Baby 

 Day-one is a blue day. • Day-two is a doji or small candle. • Day-three is a large red day.

The Abandoned Baby is a rare bearish reversal pattern characterized by a large move up followed by a doji or small candle, and then a third candle heading in the opposite direction. The formation reflects a classic three period reversal of market sentiment where after a bullish trend; enough sellers enter the market to take control. They first stop the trends momentum (doji), and then ultimately reverse the direction of the market. This first bullish move suggests a continuation of the bull market. That move is followed by a doji, where markets trade in a small range suggesting uncertainty in trend and sell off potential. Up to day two we actually have a Doji Star, moderate strength bearish pattern. After the day of indecision, a large bearish candle confirms the sell-off and reversal. The stronger the move down day-three, the stronger the reversal signal. Watch for additional bearish price action in the next few days. In Foreign Exchange this pattern is near identical to the Bearish Evening doji Star pattern. Outside of the FX Market Abandoned Babies require gaps between the close and open prices of subsequent candles and shadows. In fact the name Abandoned Baby suggests the doji baby candle is disconnected from the rest of the formation. This is possible because gaping is common in other less efficient markets where trading is restrained by business hours. Since the currency market offers 24 hour trading, gaping is rare and is only seen to a minor degree after weekends.

Engulfing Bearish

• In an established uptrend, an average to small sized blue candle occurs on day-one.

• In the second day a longer red candle forms

•Ideally with a red candles high is above the previous days high.

• The strength of the signal is additionally increased by the further the red candle closes below the low of the blue day.The Bearish Engulfing is one of the more clear-cut two day bearish reversal patterns. The formation reflects sellers overtaking buying strength, and often precedes a fall in price.

• Day-One Characteristics for Signal StrengthThe first day may even appear as a Doji, and the smaller day-one is and larger the second day is, the stronger the reversal signal. Dojis and small candles reflect uncertainty in the markets trend, thus the smaller the first days candle the better the signal of an end to the established bull trend.

• Day-Two Characteristics for Signal StrengthThe second day bear move acts to confirm the death to the bull trend. The bigger the red candle reflects the deeper the bear move and the better the reversal signal.

• Overall Characteristics for Signal StrengthThis pattern is also more meaningful if it follows a lengthy bull trend, or a recent fast move up. Both these cases suggest the market may be overbought and more apt for a reversal. Bearish Engulfing patterns also provide resistance levels for where the highest level of price action reached. In the future this level may be difficult to break.

Harami
•First day is long blue candle continuing an established uptrend.

• Day-two is a small candle or start whose range is within the first days body, above its midpoint.

Bearish Haram is are characterized by a long blue day followed by a small candle, also refers to as a star. The trading range of the star stays within the body of the previous days candle. The significance of this formation is quite clear, as price continues its uptrend it is halted by a bearish candle. Bearish Haramis are very weak in signal strength though, since even in a strong bull trend it is very reasonable to see a sell-off that pulls price back down from highs. Longs paring off their exposure may cause this. Thus candlestick analysts will watch for bearish days to come, but probably not bet on them. In non-FX markets gaps seen above that allow the star to occur deep within the body of the first days candle are typical. Such gaps are just not possible in Foreign Exchange Markets. Since the Forex Market version of this candle is more nuanced, traders pay attention to several details. This formation is very similar to the Bearhish Engulfing formation, except that the Harami move does not trade below the previous candles body. Because Harami sellers are not able to drive price much past the previous days midpoint, this patterns offers a weaker signal. In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted uptrend, analysts will attach greater importance to it. Lastly if this does turn out to be a reversal pattern the high of the two candles will likely turn into a significant resistance level.

Shooting Star
• In an uptrend, the first day is a long blue candle continuing the established bull trend.

• The second day is a candle (red or blue) with a real body at the lower end, a long upper wick and no (or almost no) lower wick.

Occurring in an uptrend the Shooting Star formation is indicative of a bearish change of momentum. Shooting Stars show that traders have tested the highs and settle the day near the open and low price. This suggests the rally is unsustainable and sellers are retaking the market. Although this pattern is fairly weak, for those traders with existing longs in the market the Bearish Shooting Star serves as a signal for the deteriorating strength of their position. • ConfirmationMany traders will wait for a bearish move on the third day, forming a formation similar to the Evening Star three-candle pattern. If day three is a long red candle, that pattern combined with the shooting star is a very strong reversal signal.