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Read MoreWhat will happen if you climb 10 storeys at a go?
Without resting. Without a sip of water.
I'd be holding onto the staircase's railing, panting, and shaking because my knees would be wobbling. And if I continue to climb, I may just pass out.
Similarly, if the stock market rallies for a prolonged time with a pause, a pullback is around the corner.
In the current bull market we are in (after the COVID-19 crash), the deepest pullback in the S&P 500 is 10.3%. This took place in Sept 2020. Thereafter, prices went sideways for nearly 2.5 months!
Understanding this principle, you'll want to spot signs of reversals and bearish continuation candlestick patterns so that you can deploy your capital elsewhere to maximize your gains.
What are these signs and candlestick patterns? Let's jump right in.
#1 Three Black Crows
There must be a gap up at the opening of the 1st candlestick. Price for that day should retreat too, resulting the body of the candlestick to turn red.
Trading Psychology
The Three Black Crows bearish reversal candlestick pattern appeared on the chart of XES is mid-Mar 2021. Let's uncover the trading psychology behind this bearish reversal candlestick pattern.
Do you remember the analogy of stair-climbing in the introduction? After a rally, prices need to rest.
Market participants were highly optimistic on XES. They bought shares of XES and this led to a huge rally in Feb 2021. Prices rose by 30% till early Mar 2021!
However, market participants have been selling their shares to realize their profit on the way up. It was at $66 that the market participants decided that XES is too expensive and decided to cash out. That led to a drop in price to about $62, before rebounding the day later.
On the 1st candlestick in the Three Black Crows candlestick pattern, market participants were still bullish. This is shown in the gap up. But little did they expect the bears to be out to push prices down throughout that day.
The next day, the bulls were back in the frame. They managed to push prices higher briefly before the bears stepped in once again. This explains the upper wicks. The bears won that day, resulting in another red candlestick.
The bears continued battling the bulls on the following day, with the bears winning again, but not without a fight back from the bull. This is inferred from the lower wick.
It was right after the 3rd candlestick in the Three Black Crow bearish reversal candlestick pattern that the bears ran riot. Prices collapsed by $21.40 (13.3%) in just over a week!
Imagine buying 100 shares of XES. You've lost $2,140! But all hope is not lost if you have a stop loss in place. Find out where your stop loss should be for XES here.
#2 Three Identical Crows
The only difference here is that the body of the candlesticks are identical in height. This is rare, and last spotted on the chart of CF in mid-Jan 2021.
Trading Psychology
What do you notice about the gradient of the uptrend? How steep was it? This rate of increase proved to be unsustainable. It is akin to sprinting up 10 storeys in a go.
In mid-Jan 2021, the market participants no longer felt optimistic about CF. They sold part of their holdings to enjoy their sweet profit. This can be inferred from the presence of more red candlesticks as the Three Identical Crows pattern was formed.
The inevitable pullback happened, with prices sliding by $3.55 (8.2%) in a short week.
#3 Downside Tasuki Gap
There must be a gap down between the closing price of the 1st candlestick and the opening price of the 2nd candlestick. Because this bearish candlestick pattern occurs in the middle of a pullback or downtrend, its signifies that the bears are still in control.
Trading Psychology
Prices of ADSK were already dropping before the Downside Tasuki Gap was formed in late Feb 2021. What can you uncover from the minds of traders then?
The Shooting Star candlestick pattern is one of the most bearish patterns. When it appears, you can be pretty sure that prices will be coming down in the next few days to even weeks. This was the case in early Feb 2021.
Prices of ADSK pulled back and Downside Tasuki Gap bearish candlestick pattern was formed. The huge body of the 1st candlestick tells us that the bears are extremely strong.
The next day, the bears took charge right from the start (as shown by the gap down). However, the bulls fought back hard. They managed to push ADSK's price up from $280 to $290! Determined to win this, the bears came back stronger and pressed prices further down.
Undeterred by the bears, the bulls regrouped and staged a strong fight against the bears on the 3rd candlestick. They won that day, but failed to close the gap between the 1st and 2nd candlestick. This is a bearish sign, which proved to be true the very next day. In just a week, prices crashed by $32.05 (11.25%).
#4 On Neck Line
The 2nd candlestick must gap down and open lower than the closing price of the 1st candlestick. Ideally, the closing price of the 2nd candlestick should ne at or very near the closing price of the 1st.
Trading Psychology
The On Neck Line bearish candlestick pattern appeared while prices of PTON was sliding in mid-Feb 2021. Let's have a look.
Prices of PTON soared more than 400% in a year alone! It's 1st significant pullback took place in Nov 2020, as prices dived by 30% in a month.
The share price of PTON shot up again before a long downtrend. There had been multiple signs of weakness when prices topped $165. Prices were stuck in a wide range between $142 and $167 (that's 17.6%)! PTON became a Type 4 market (you'll need to create an account to view this article).
Lower highs started forming eventually. This indicates that the bears were growing in confidence and strength. Then the inevitable happened.
Just before the On Neck Line candlestick pattern was formed, a huge and long bearish engulfing candlestick pattern appeared.
The 1st candlestick of the On Neck Line candlestick pattern gapped down. As the day went by, the bears asserted more control by pushing prices lower. The bulls started to put up a fight, but were unable to win that day, leaving a long lower wick.
The next day, the bears returned for more blood as the 2nd candlestick gapped down. Sensing a buying opportunity, the bulls emerged to fight the bears and won that day. However, this win was only short-lived. Prices quickly slid by $44.40 (32%) in just 2 weeks, erasing all the gains made from Dec 2020.
3 Things You Must Remember About These Candlestick Patterns
#1 The Three Black Crows and Three Identical Crows candlestick patterns are formed after an uptrend
#2 The Downside Tasuki Gap and On Neck Line candlestick patterns are formed in a pullback or downtrend
#3 The drop after these candlestick patterns are huge, so make a run when any of them appear
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