The Dark Cloud Cover is a bearish reversal candlestick pattern that emerges during an uptrend. It implies a potential shift from a bullish to a bearish trend. The Dark Cloud Cover is a distinct variation of the engulfing pattern, and if one can comprehend the engulfing pattern, understanding this particular pattern is not overly challenging.
The Dark cloud can be better understood with below image –
As we can see from above image this pattern is formed by combination of two candles.
1st candle – This is a strong bullish green candle; it shows continuation of the existing uptrend.
2nd candle – This candle is strong bearish red candle and it opens higher than the high of the preceding candle (2nd candle open > 1st candle high), it has been clearly shown in the above image. This candle should close below the midpoint of the 1st candle. It shows that buyers lost control and now sellers are in control.
It should be noted that the 2nd candle should close deeply within the 1st candle. The greater the depth or penetration, the more profound the pattern. It is generally assumed that the 2nd candle should penetrate at least 50 to 60 percent of the real body of the 1st candle.
There may be GAP UP between the 1st and 2nd candle. It indicates that the market is robust and that’s why it opens with gap at next trading session.
The following points should be kept in mind when observing this pattern:
- If there is a strong green body with a shaven bottom (no lower shadow) or the open price = the low price, and with a shaven head (no upper shadow) or the close price = high price, and then the next candle is a strong red bullish candle. This indicates a robust pattern, as illustrated in the image below.
- If the second candle opens at major resistance levels and then fails to bounce back beyond the resistance level, the bulls (buyers) will lose control, and bears (sellers) will gain control.
- Once again, volume is crucial and plays a significant role in any chart pattern. The second candle should have high volume. This is important because it induces panic in the minds of buyers, leading to more selling pressure than buying pressure.
