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Figure 1. Dark cloud cover
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- Criteria of the «dark-cloud cover» pattern (Figure 1):
- The pattern consists of two candles that occur after an uptrend (or near the upper border of the trading range).
- The first candle is white with a strong body. On the next bar the opening price exceeds the high of the preceding bar but the bar closes near the low and overshadows considerable part of the white body of the preceding candle. The lower the closing price of the black candle is the higher probability the top will form. It is considered that the closing price of the black candle must overshadow more than 50% of the body of the white candle.
Let’s try to explain what is happening in the framework of the «dark-cloud cover» pattern. At first the market rises (the white candle). The following candle opens higher than the maximum of the white candle — the bulls are exultant. They seem to have full control over the situation but the price increase stops. The bears are starting to gain control over the situation and the candle closes near its lows, overshadowing most part of the white candle. The bulls are starting to panic as their positions went into the red. The bears receive a target for a stop-loss (the highest price of the second (black) candle of the pattern).
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Figure 2. Example of the pattern
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- Factors strengthening the «dark-cloud cover» pattern:
- The more the black candle covers the body of the white candle the stronger the pattern is.
- If during a long-lasting uptrend a white candle with a long body and without shadows appears and on the next day a black candle with a long body and without shadows appears it is said that «a black day with a truncated top and bottom» has come.
- If the second candle of the pattern opens higher than an important resistance level but then the price falls below this level it means the bulls can’t control the market and there is a high probability a top will form.
- If the second bar is accompanied by a larger trading volume than the first one it indicates the uptrend has spent its force.
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