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Powerful Candlestick
Patterns for a Bear Market
2008 has proved to be a dismal
year, at least from an economic
perspective. The equities markets have
clearly been bearish in tone.
Indicators being issued by the government
reflect an economy that is deteriorating and
moving into a recession. When bear
markets like this appear, certain
candlestick patterns become an extremely
useful tool for investors.
Candlestick charts offer all
the information of a bar chart, but enhance
the data in a pictorial display, allowing
the investor an improved ability to
recognize trends and the likelihood of the
continuation or reversal of these
movements. Certain candlestick
patterns are ideal in our current
market.
The Evening
Star
The pattern known as the
Evening Star is one of the most widely used
formations to confirm the continuation of a
bear market. The evening star
candlestick pattern is easily
recognized. The first candlestick
should have a long white body followed by a
much smaller gapped up price formation that
fails, and this is confirmed on the next day
with a down close and a closing price below
the midpoint of the original first
candlestick.
When these types of patterns
emerge, there a clear indication that market
participants have lost confidence in the
possibility of price appreciation and more
likely than not, prices will continue to
drift downward.
The Harami
Another formation, interpreted
by traders as signaling continued bearish
sentiment, is known as the Harami. This is a
simple two day candlestick pattern with a
relatively small body on the second day that
is completely surpassed on both sides by the
previous day’s candlestick always of the
opposite color.
The formation is totally
unmistakable. It usually occurs during
a minor correction in a bear market and
signals that this temporary uptrend is
reaching an end, and the underlying
downtrend will continue. It is
especially considered a strong indicator
when it appears together with low trading
volume.
The Harami
Cross
A variation of the Harami, with
the same interpretive consequences, is
referred to as the Harami Cross. The
only difference between the two is that the
second day of the Harami Cross is a Doji;
that is, the opening and closing prices are
essentially equal. In essence, this
one day pattern resembles a type of cross or
plus sign. Transactions occur above
and below the opening price during the
trading session, but there is no consensus
in the market as to which way the future
direction should be.
Dark Cloud
Cover
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Another pattern
seasoned investors keep an
eye out for during a bearish
market is referred to as a
Dark Cloud Cover candlestick
formation. This is a
two-day formation. The
first has a long white body
followed by the second day,
which is black, but has a
new high, while at the same
time closing below the
midpoint of the previous
day’s trading.
This too is
regarded as a bearish
reversal pattern that occurs
during minor corrections in
a downward trending
market. The Dark Cloud
Cover represents an entry
opportunity to benefit from
the underlying downward
trend.
Because of the
improved visualization
offered by candlestick
charts, several patterns
have emerged and are
recognized by astute traders
as powerful tools to profit
in a bear market. An
individual investor who can
successfully recognize these
patterns will greatly
improve upon his trading
performance.
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