This is a two-candle reversal pattern: on day 1 selling pressure is high, sellers and short sellers are in control and the long candle closes near the bottom of the range; on day 2 there is another long candle but in the opposite direction, starting even lower than the previous close and closing at least halfway into the prior candle.
The short sellers who shorted the stock on day 1 are in a loss on day 2; most of them will cover creating a buying pressure and a potential reversal situation.
The first candlestick of the Piercing Line pattern is bearish.
The second candlestick:
• opens below the low of the first candlestick; and
• closes above the mid-point of the first candlestick.
The Dark Cloud Cover is the equivalent bearish version of the Piercing candlestick pattern.
The first candlestick is bullish and the second candlestick behaves as follows:
• Opens above the high of the first candlestick, and
• Closes below the mid-point of the first candlestick.
In both patterns, the second candle opens with a gap away from the close of the first bar. Hence, these candlestick patterns are unusual in intraday time-frames where gaps are uncommon.
It means some traders are clearly disappointed.
In the Piercing Line pattern, the second bar opened with a gap down, giving an initial hope of a strong bearish follow-through.
However, not only did the bearishness fail to materialise, it proceeded to erase more than half of the bearish gains from the first bar. This bullish shock offers a great long trade.
Likewise in the Dark Cloud Cover pattern, the first gap up prompted hope from the bulls before the lower close crushed it.
How do we trade it?
1. Find major bullish reversals with the Piercing Line pattern (preferably after a break of a bear trend line)
2. Find major bearish reversals with Dark Cloud Cover pattern (preferably after a break of a bear trend line)
