February 7

Signs Of A Bearish Reversal You Must Know (Part 4)

When the stock market is rising and almost everyone around you is talking about stocks (especially sharing tips), it is a warning that a market correction or bear market is near. There is an old saying which goes “If shoe shine boys are giving stock tips, then it’s time to get out of the market.” Why?

I dislike Physics. I believe that Physics dislikes me just as much. There’s no way you’d see me solving problems in the world of Physics. If I ever start a conversation regarding Physics, you’d know that I’m trying hard to impress.

Besides the chatter about the stock market, these bearish reversal candlestick patterns should drive us (traders) to sell our stock holdings. What are they?

#1  Three Inside Down

Let’s have a look at how the Three Inside Down bearish reversal candlestick pattern look like.

Characteristics and significance of the three inside down bearish reversal candlestick pattern

The prevailing trend must be up. The Three Inside Down candlestick pattern should also be found at the top of an uptrend.

Remember this: There must be a gap down on the 2nd and 3rd candlestick.

Trading Psychology

The Three Inside Down candlestick appeared on the chart of BH in late Apr 2019. What happened next was a collapse of 37% in 1 month. Imagine seeing a drop of 37% when this could’ve been avoided.

three inside down bearish reversal candlestick pattern on the chart of BH

BH was in a steady uptrend. Prices exploded just before the Three Inside Down candlestick pattern was formed. This shows that the market participants were extremely optimistic and bullish. This could also be inferred from the 1st candlestick of the Three Inside Down candlestick pattern.

There were signs of selling pressure from the 1st candlestick too. The bulls had pushed prices up to $165. However, the bears stepped in and pressed prices down to $162, leaving a wick at the top.

The next day, the bears managed to defeat the bulls as prices gapped down to $161.51 and dropped by $5 to close at $156. The bulls were weak and retreating as the red candlestick is almost a Marubozu (a candlestick with short or no wicks).

On the 3rd day, the fate of BH was sealed. The bears were in total control and prices slumped by 37% or $55.40 in a month!

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#2 Three Outside Down

How does the Three Outside Down bearish reversal candlestick pattern look like? What are the important characteristics?

Characteristics and significance of the three outside down bearish reversal candlestick pattern

This bearish reversal candlestick pattern must also appear at the top of an uptrend. The length of the 2nd and 3rd candlesticks should be of the same height for greater accuracy.

Let’s discover the psychology behind the market participants when this candlestick pattern appeared on the chart of EW.

Trading Psychology

The Three Outside Down bearish reversal candlestick pattern appeared on the chart of EW in early Sept 2020. What led to its formation and the subsequent drop of 11%?

three outside down bearish reversal candlestick pattern on the chart of EW

EW was enjoying a fine rally since mid Aug 2020. Did you notice that all of the candlesticks are green (bullish)? Most of them are large too. The bulls were firmly in control.

All of these were about to change when the Bearish Engulfing candlestick pattern appeared. The bulls started off well on the 2nd candlestick but ceded ground to the bears.

Throughout the day, the bears overpowered the bulls, pushing prices below the opening price of the previous day. The market sentiment had turned bearish. This was confirmed by the 3rd candlestick.

The 3rd candlestick opened at the closing price of the 2nd candlestick and continued to go lower as the day progressed. This completed the formation of the Three Outside Down candlestick pattern, leaving investors and traders who held on to a 11% or $9.17 loss in 2.5 weeks. Prices briefly recovered in late Dec 2020 (4 months later) before sliding back into a loss.

#3 Bearish Breakaway

The Bearish Breakaway bearish reversal candlestick pattern is made up of 5 candlesticks. This candlestick pattern is extremely rare.

Characteristics and significance of the bearish breakaaway bearish reversal candlestick pattern

As with all bearish reversal candlestick patterns, this must be formed at the top of an uptrend.

Trading Psychology

The Bearish Breakaway candlestick pattern was seen on the chart of FSLR in late Aug 2012.

bearish breakaway bearish reversal candlestick pattern on the chart of FSLR

Prices of FSLR were rising fast in Aug. There were gap ups on most days; market participants were extremely bullish.

But its rise wasn’t sustainable. Towards the end of Aug, the strength and conviction of the bulls waned. This can be inferred from the smaller candlestick bodies. Finally, the bulls couldn’t hold their ground and the bears took charge forcefully on the 5th candlestick.

Prices crashed to close the gap that’s between the 1st and 2nd candlestick. This is an extremely bearish situation.

The bears continued pushing prices down by $5.33 or 22.6% in just 5 days.

#4 Bearish Rickshawman

The Bearish Rickshawman is found at the top of an uptrend which ends with a long legged Doji.

Characteristics and significance of the bearish rickshawman bearish reversal candlestick pattern

Let’s understand the market psychology behind the Bearish Rickshawman.

Trading Psychology

The Bearish Rickshawman is made up of a large bullish candlestick followed by a long legged Doji. This was spotted in the chart of LULU in early Sep 2020.

bearish rickshawman bearish reversal candlestick pattern on the chart of LULU

The market participants have been bullish on LULU, causing its share price to surge in the month of Jul and Aug 2020. They remained bullish at the start of Sep, but that was about to end.

The bulls pushed prices up aggressively on the 1st candlestick of the Bearish Rickshawman candlestick pattern. They were still strong and continued to push prices up on the 2nd day, shown by the gap up. The bears began stepping in and momentarily pressed prices down, leaving a long lower wick.

The bulls managed to regain their ground to end that day marginally higher than the start. This is a bearish signal.

Prices plummeted by $108.08 or 27.23% over the course of the next 2.5 weeks.

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3 Things You Must Remember About These Candlestick Patterns

#1 These 4 bearish reversal candlestick patterns are powerful and rare

You don’t want to be caught by the huge downward move resulting from any of these 4 bearish reversal candlestick patterns.

#2 Recognize these candlestick patterns

You are therefore able to anticipate a bearish move, selling quickly to protect your trading profits.

#3 Employ a stop loss

This will help you take a smaller loss when the market turns bearish, helping you to achieve financial freedom quicker.

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