In this article we are going to cover a Japanese candlestick pattern that is well know in bullish circles to exhibit the nasty trait of crashing their bull parties, bringing with it the most hated of colors, red! This candlestick formation is correctly and ominously called the dark cloud cover. The appearance of this formation often sends bulls hightailing it to greener pastures and growing angry bears piling on in preparation of the feeding frenzy they suspect is just around the corner. All they are waiting on is confirmation of their reservation at the table, which is possibly only just a candlestick away.
This dark cloud cover requires two candlesticks to complete the pattern with the first being a long white candle that shows the continuity of an uptrend. The second candlestick opens strong and above the previous candle often fooling bulls into believing the uptrend is continuing. However, as the session continues hungry bears wrestle control from the bulls, pushing the candlestick ever deeper into the precedenting closestick closing at or near the low of the day. The result is the formation of the dark cloud cover that sends the bulls home with horns removed.
The deer the second candlestick pushes into the previous candlestick, the more powerful the indication of a possible trend reversal. On the third day, confirmation is realized if a black candlestick is formed with a lower close or a gap down. Once confirmation has been given, the bull party has now been turned into a marauding bear feeding frenzy.
The formation of a dark cloud cover is a highly reliable indicator, revealing that a trend reversal to the downside may be about to occur. Bulls should consider scaling out positions while bears should consider opening positions once the reversal is confirmed. Japanese candlestick chart patterns like the dark cloud cover have been used for centuries starting with rice traders in feudal Japan, and more recently in the financial markets, to predict price movement. Integration of candlestick charting into a trading system may help increase the percentage of winning trades.