Bump & Run Reversal
Developed in the mid to late 1990’s by Thomas Bulkowski, this charting pattern is a reversal pattern that forms after prices are driven up too far and too fast by excessive speculation.
This pattern identifies temporary advances that cannot be sustained for a long period. The pattern comprises of 3 elements – the lead in, the bump and the run.
The first part of the pattern is a lead-in phase that can last 1 month or longer and forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner, and there is no excess speculation. The trend line should be moderately steep. If it is too steep, then the ensuing bump is unlikely to be significant enough. If the trend line is not steep enough, then the subsequent trend line break will occur too late.
The bump forms with a sharp advance and prices move further away from the lead-in trend line. Ideally, the angle of the trend line from the bump’s advance should be about 50% greater than the angle of the trend line extending up from the lead-in phase.
The run phase begins when the pattern breaks support from the lead-in trend line. Prices will sometimes hesitate or bounce off the trend line before breaking through. Once the break occurs, the run phase takes over, and the decline continues.
Bearish Belt Hold
This particular pattern forms during an upward trend and will often indicate that the market has shifted from bullish to bearish. However this pattern is not used solely to predict market direction – it is not considered a reliable price prediction pattern.
A bearish belt hold begins with a number of bullish trades (blue candlesticks). This will be followed by a large red candlestick whose opening price is the daily high but is higher than the close for the previous day. The stock price will continue in a downward trend for the remainder of the day hence the long real body with no upper shadow and a small lower shadow.
The opposite of bullish this engulfing pattern is represented by a small blue candlestick with small upper and lower shadows followed by a large red candlestick. The blue candlestick is within the real body of the red candlestick
The large red candlestick overshadows the small blue candlestick and appears to be ‘engulfing’ the smaller candlestick
The Bearish Engulfing is one of the more clear-cut two day bearish reversal patterns. The formation shows that sellers have overtaken the buying strength and often precedes a fall in price. A Bearish Engulfing patterns also provide resistance levels for where the highest level of price action reached. In the future this level may be difficult to break.
The Harami is a two day candlestick pattern and is named for its appearance – Harami is the Japanese word for pregnant. A candlestick that forms within the body of the previous candlestick is in the Harami position. The first candlestick usually has a large body and the second a smaller body than the first. The upper and lower shadows of the second candlestick do not have to be contained within the first, though it’s preferable if they are.
The bullish harami is a downtrend of negative-coloured (red) candlesticks engulfing a small positive (blue) candlestick. This is giving a sign of a reversal of the downward trend. Because the bullish Harami indicates that the falling trend may be reversing, it signals that it’s a good time to enter into a long position. The smaller the second (blue) candlestick, the more likely the reversal.
A variation to the Harami is the Harami Cross.
Dark Cloud Cover
The pattern is evident when a red candlestick follows a long blue candlestick. It can be an indication that a possible bearish trend will occur. Essentially, the large red candle is forming a “dark cloud” over the preceding bullish trend.
The dark cloud must have a closing price that is within the price range of the previous day but below the mid-point between open and closing prices of the previous day.
The dark cloud cover is the bearish version of the piercing line. An upward trend appears to be continuing strongly with the opening level of the second candlestick being above the highest level of the candlestick from the previous day.
However, during the session, the balance of power shifts and the stock closes weakly, within the lower half of the body of the prior candle. In this version of the pattern, the second candle has a red body while the first has a blue body.
A Doji Star is a chart pattern that shows a Doji Star gapping away from a long red or blue candlestick real body.
The blue or red candlestick indicates a bearish or bullish market whilst the Doji Star shows indecision or uncertainty in the market place. The Doji following the large real body candlestick can be a standard Doji, long legged Doji, butterfly Doji, gravestone Doji or 4 price Doji.
A gravestone Doji is the opposite of a dragonfly Doji. A gravestone Doji is a Doji which has no real body, no lower shadow and a very long upper shadow. It looks like an upside down capital T.
The gravestone Doji confirms that the buyers still dominated the market during the day with the daily high being quite high. However the opening and closing price are nearly equal, indicating that the sellers resurfaced at the end of the day to drive the price back down – the closing price was therefore the same or near the opening price.
This pattern describes the downward movement of a stock. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.
A downtrend is the opposite of an uptrend and can last anywhere from a few minutes to a few months. Once a downtrend has been identified, traders will be very cautious about entering into long term trades.
The Harami Cross is a variation of the Harami pattern and forms when the last day candlestick is a Doji. Therefore a Harami Cross is a candlestick with a large real body followed by a Doji candlestick that falls within the real body of the large candlestick.
A Harami Cross can be either bullish or bearish, depending on the previous trend. The appearance of a Harami Cross increases the likelihood that the trend will reverse.
This chart pattern is a standard hammer candlestick that is upside down (similar to a hangman). This candlestick has a long upper shadow and small real body. It looks similar to a shooting star however it forms after a downward trend.
Inverted Hammers represent a potential trend reversal. After a downward trend the buyers or bulls were not able to sustain their momentum and prices closed well off of their highs. The inverted hammer then has a long upper shadow. An Inverted Hammer followed by a gap up or long blue candlestick with heavy volume could act as bullish confirmation.
This is a 5 day charting pattern which has 3 large red candlesticks in a downward trend followed by a red candlestick with a long upper shadow then a blue candlestick. The red candlesticks are like the downward steps on a ladder with the fourth candlestick indicating the bottom of the ladder (hence the name).
The first several days clearly establish a consistent downtrend. The fourth day is an inverted hammer showing that there is now a battle between buyers and sellers with the daily high well away from the real body of the inverted hammer. This candlestick indicates that sellers are losing control in the market. On the fifth day, the market rallies with the buyers taking control which creates the long blue candle. Candlestick analysts would look for buying opportunities after this pattern.
Morning Doji Star
Similar to a Morning Star, this is a rare 3 day reversal pattern and is considered one of the strongest chart patterns.
Day one is a long red candlestick indicating a downward trend. Day two is a small blue Doji indicating that there is a change in the market trend. Day three is a large blue candlestick confirming that the downward trend has been reversed and is now moving in an upward direction. By day three it is clear that the bulls have taken control of the market direction – the longer the candlestick the stronger the reversal signal.
The morning star is a 3 day chart pattern that is used by traders and analysts to predict a reversal in the current trend, i.e. a reversal of the downward trend.
Day one comprises a large red candlestick, indicating that the market is controlled by the sellers (bearish).
Day two is a very small candlestick that can be either red or blue (a small spinning top with very small upper and lower shadows).
Day three is a medium to large blue candlestick confirming a reversal in the market trend. The day three candlestick will open above the day two candlestick and near the middle of the real body of the day one candlestick.
Traders and analysts will use other market data to confirm this reversal in market direction.
The piercing line is a bottom reversal pattern and the opposite of the dark cloud cover pattern.
This pattern comprises a large red candlestick on day one followed by a blue candlestick on day two. For a piercing line the blue candlestick must close within the top half of the previous day red candlestick.
This pattern shows that the sellers were initially in charge however there was a reversal in trend and the market is now controlled by the buyers. It is common for this pattern to be followed by more bullish days with further blue candlesticks
The price at which a stock or market can trade, but not exceed, for a certain period of time. It is also referred to as the “resistance level”.
As you can see from the graphic the stock trades between $10 and $70 the resistance level for this particular stock is $70.
A reversal is a sudden change in the market direction of a stock, index, commodity or derivative security.
Also described as a “trend reversal”, “rally” or “correction”, a reversal can be in either a positive direction or negative direction.
A variation to the Star pattern, the Shooting Star is a bearish reversal pattern and can mark a potential trend reversal or resistance level. The candlestick forms when prices gap higher at the market open then continue to increase during the day however they close much lower than the daily high.
The resulting candlestick has a long upper shadow and small real body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag.
To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body. Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.
Star (Also known as Hoshi)
This candlestick pattern occurs when a candlestick gaps above or below another candlestick. The pattern shows a clear gap between the two candlesticks.
A typical star pattern shows a candlestick with a large real body followed by a gap then a candlestick in the star position with a small real body and little or no shadow. These candlesticks can be any combination of colours.
The variations to this pattern are the shooting star, morning star and evening star.
Three Gaps (Sanku)
Sanku is the word used by the Japanese to describe a pattern with three gaps. It consists of three separate gaps located within a strong trend. After the third gap, the pattern is used to predict an impending reversal in the direction of the market.
This pattern is used by analysts to determine the exhaustion of a trend and a possible change in direction. Technical traders do not rely on this pattern alone – they combine this information with other technical indicators to determine the impending market direction.
A Sanku pattern does not pin point a reversal in the market direction just that a reversal is likely to occur in the near future.
Three Outside Up
Similar to other bullish reversal patterns, this pattern starts with a medium red candlestick. Day two and three are both blue candlesticks with specific characteristics. Day two candlestick must engulf (overshadow) the real body of the day one red candlestick. Day three blue candlestick must close higher than the day two candlestick.
The Bullish Three Outside Up pattern is one of the more clear-cut three day bullish reversal patterns. The formation reflects that the buyers have seized control from the sellers and usually precedes an upward trend rally.
The pattern on days one and two form a bullish engulfing pattern which is a strong two day reversal pattern.
Three Inside Up
Day one of this pattern is a downward trend with a long red candlestick. Day two is a small blue candlestick that trades up to the bottom half of the day one candlestick. Day three is also a blue day with the candlestick showing that the market traded above the day one candlestick levels.
The first two days are a bullish harami pattern which show that the buyers are overtaking the sellers and have reversed the market trend to an upward direction.
This pattern confirms that the trend reversal will continue with day three being a blue candlestick. For confirmation of this pattern the day three candlestick must close above the high of day one, creating a new high.
Three Stars In The South
A three day pattern with each day comprising a red candlestick.
Day one red candlestick has a very long lower shadow. Day two red candlestick has a smaller real body and smaller lower shadow. Day three red candlestick has no upper or lower shadow and is quite small.
Analysts do not usually rely on this pattern as a strong buying indicator – they normally use this pattern as an indication to sell their short positions and monitor the market for buying opportunities.