• Home
  • Knowledge base
  • Useful Forms
  • FAQ

Why is the Dark Cloud Cover pattern important for traders?

Modified on: 2018/07/11
A:

The dark cloud cover pattern is important for traders as a possible signal of market reversal to the downside. It is not considered as strong a signal as the more definitive bearish engulfing candlestick formation but, nonetheless, it is important to note as a potential bearish indicator, especially if it forms on a higher time frame chart, such as a daily chart. On lower time frames, the significance of a dark cloud cover is considerably reduced.

The dark cloud cover forms as follows: The previous candlestick appears very bullish with a long body that closes to the upside. The next candle gaps to an even higher price level at its open, but then the price falls back so the candle closes in the lower half of the body of the preceding up candle. The fact that the candle opens higher, but then closes by erasing more than half of the previous candle's gains, is what gives it a bearish character and also its name. The candle opens "sunny," but then "dark clouds move in." The bearish indication of the dark cloud cover is strengthened if the candle that follows it closes below the low of the up candle that immediately preceded it. From that point, price may proceed steadily downward without significant upward retracement for some time.

Traders evaluate the significance of the dark cloud cover as being increased by any of the following factors:

1. The bodies of both the preceding up candle and the dark cloud cover down candle are very long.
2. The higher the opening gap up by the dark cloud cover candle, the more marked the reversal downward.
3. The pattern occurs near a major resistance level, especially if the gap up is over the resistance level, but the candle's eventual close is below the resistance level.
4. There is a high volume of trading during the formation of both candles.


Did you find it helpful?
Related Articles