The Piercing Pattern

The Piercing Pattern helps to identify continuation pattern and whether there is possible reversal of uptrend to downtrend. It usually occurs at the end of a downtrend. It helps to identify a potential reversal in the market sentiment from bearish to bullish. The pattern is formed by two candlesticks. The 1^st candle is red (bearish) followed by the 2^nd candle that is green (bullish). It is opposite of engulfing pattern, it only pierces but don’t wrap around it.

The following pattern become more clearer from below image:

The following pattern can be described below –

1^st Candle – It is strong red (bearish) candle, it shows that downtrend is still in continuation

2^nd Candle – It is green (bullish) candle, 2^nd candle opens lower than the low of the first candle, creating a gap down i.e. 2^nd candle’s open price < 1^st candle’s low price.

The likelihood of a downtrend reversal is determined by the extent of penetration. If the 2^nd candle penetrates more deeply into the 1^st candle, there is a higher potential for a reversal. A lesser penetration of the 2^nd candle into the 1^st candle may indicate a false reversal, with a higher likelihood of the downtrend persisting. Additionally, an increase in volume during the Piercing Pattern enhances the credibility of the bullish reversal signal.

We can further categorise the level of penetration into 3 types as follows:

On neck – In this, 2^nd candle’s close price is near the 1^st candle’s low price.

In neck – In this, 2^nd candle’s close price is near the 1^st candle’s low price.

Thrusting – In this, 2^nd candle deeply penetrates into 1^st candle, it might suggest potential reversal of downtrend. The golden rule is that deeper the penetration, higher the chances of bottom reversals.

Usually, confirmation is required in order to validate this pattern.