Dark Cloud Cover Signal Pattern is a bearish reversal pattern that continues the uptrend with a long green body. The next candle opens at a new high then closes below the midpoint of the body of the first candle. The pattern is more significant if the second candle’s body is below the center of the previous body. The pattern is casting a “dark cloud” over the bullish trend that preceded it. Confirmation of the pattern is achieved when another red candle, of smaller size, forms after the second candle.
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.
Most traders use the Dark Cloud Cover pattern in conjunction with other forms of technical analysis as confirmation. For example, traders might look for a relative strength index (RSI) greater than 70.0, which provides a confirmation that the security is overbought. A trader may also look for a breakdown from a key support level following a Dark Cloud Cover pattern as a sign of a longer-term downtrend.
Formation of Dark Cloud Cover Signal Pattern
This pattern is formed by the combination of two candlesticks. The first one is a trending green candle and the second is the reversal red 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 green 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 red candlestick.
The five criteria for the Dark Cloud Cover pattern are:-
- An existing bullish uptrend.
- A bullish candle within that uptrend.
- A gap up on the following day.
- The gap up turns into a bearish candle.
- The bearish candle closes below the midpoint of the previous bullish candle.