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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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