Identifying a bullish piercing line pattern

Like the bullish meeting line pattern (see the previous section), the bullish piercing line consists of a long black candle on the setup day and a long white candle on the signal day. The open of the signal day should be lower than the low of the setup day. This means that bearishness persists on the setup day, and then the open of the signal day reveals more selling because the open is lower than the setup day's low. The signal day's close is much higher than the open, which means that the bulls came in as a reaction to the lower opening price and pushed prices higher. The tide, therefore, has turned in favor of the bulls.

Figure 7-19 is a good example of what a bullish piercing line looks like.

Figure 7-19:

The bullish piercing line pattern.

Trading on the bullish piercing line

The bullish piercing line pattern combines a setup day that's a long black candle. The signal day is a bullish candlestick that opens with a gap down, but closes well within the range covered by the first day. This is a case where the bulls show up after a bearish open and decide it's time to take charge and push prices up.

Figure 7-20 is an example of a bullish piercing line appearing on the chart of a railroad stock for Burlington Northern Santa Fe Corp., which trades under the symbol BNI. You can't beat this example for a clear representation of the bullish piercing line pattern showing up and signaling the end of a downtrend. The setup day is a long black candle, and the signal day has a gap opening before the bulls show up and make a solid bullish run. Notice that the signal day doesn't have a high that exceeds the high of the first day. If it did, and if its close exceeded the setup day's open, this would be a bullish engulfing pattern. (I cover the bullish engulfing pattern earlier in this chapter.)

The bullish piercing line failure example I provide here occurs on a chart of FedEx Corporation (symbol FDX). In this case, the bullish piercing line doesn't deliver. As you can see in Figure 7-21, in the midst of a downtrend, a bullish piercing line appears. The following day, the low price of the bullish piercing line is violated by that day's low. This sign is clear that the bullish activity from the previous day isn't as strong as the long white candle day indicated. It takes a couple of days, but the downtrend in FDX continues.

Figure 7-21:

A failing bullish piercing line on a chart of FDX stock.

Figure 7-21:

A failing bullish piercing line on a chart of FDX stock.

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