Dark cloud cover patterns are two candlestick patterns found at the top of uptrends or near resistance levels and signal a reversal to the downside. The second bearish candle covers up to half of the first bullish candle. Look for price action to fall below the second candlestick and hold to confirm bearish continuation.
Table of Contents
What Are Dark Cloud Cover Patterns?
A dark cloud cover pattern consists of two candlesticks that form near resistance levels where the second candle covers half or part of the first candle. Typically, when the second candle forms, it cannot hold above the first candle and causes a failure.
These patterns are three candlestick patterns. This pattern can signal a bearish reversal in a bullish trend.
Dark cloud cover patterns form when a bearish candlestick forms a “dark cloud” over a bullish trend. The bearish candle opens above a bullish candle’s close with a confirmation candle forming; hence the three candle pattern.
The bulls push price higher at the open but the bears ultimately took over. This causes the price to be pushed lower and the bears are in takeover mode.
This takeover is a sign that there could be a bearish reversal coming. The dark cloud cover is a sign of an impending storm. A dark cloud cover pattern is made stronger if the candle closes below the low of the confirmation candle; from there price can move down.
How to Trade Dark Cloud Cover Patterns
- Watch for 1st top candlestick to form
- Next, watch for 2nd candlestick to cover half or part of 1st candle
- Then, watch for 3rd candlestick to fall below 2nd
- Traders take a short once price breaks below the 2nd candlestick
- Place stop at top of the 2nd candle
- Some traders take a long position once price breaks above 2nd candle
- Then place stop below the 2nd candle
Technicals
There are five different things dark cloud cover patterns need. First need to find an existing bullish trend. Cannot have a bearish reversal takeover without a bullish trend in place.
Next, a bullish candlestick within the uptrend is needed. This is the first candle in the dark cloud cover pattern.
Third, the second candle should begin the day gapped up. When traders see that at the open they might be inclined to think it part of the gap up patterns and go bullish. Unless they caught it the day before and sold at the open, more than likely are going to be disappointed.
Fourth, the reason for disappointment is because the gap closes and turns into a bearish candle. Bulls started the day in control but the bears came in and closed the gap driving price down.
Last and the 5th thing, the bearish candle should close below the midpoint of the bullish candle from the previous day. Those first 2 candles should have long real bodies with little to no wicks.
