The bearish abandoned baby pattern

The bearish abandoned baby pattern is fairly rare, but when it pops up, it can be a very powerful indication that a quick trend change is in the works. In fact, the abandoned baby pattern examples in this book — both the bullish examples in Chapter 9 and the ones I present on the following pages — were some of the most difficult patterns for me to find when I was gathering chart examples. And it's worth noting that it was especially hard to find examples where the pattern failed.

Spotting the bearish abandoned baby pattern

A bearish abandoned baby pattern starts with an up day in an uptrend. That's followed by a day that sticks way out by itself on the chart, and that day is often a doji with a gap opening that isn't filled in. The third day is down and includes a gap down opening between the second and third days. You can see a bearish abandoned baby in Figure 10-13, but please don't call child services. It's only a candlestick, after all.

Figure 10-13:

The bearish abandoned baby pattern.

Trading on the bearish abandoned baby pattern

I'm fond of the bearish abandoned baby example on the chart in Figure 10-14 — a chart of the stock for eBay — because the trend is rolling over at the same time that the pattern shows up. The first day is clearly bullish, and the uptrend is in place, even though it looks to be rolling over. There's a gap between the first and second day, and the open and close of the second day are in a tight range. That range falls near the low end of the wick, which serves as a bearish indicator. The third day is up, but only after a very large gap down opening. Even though the bulls make a run on the third day, the close is pretty discouraging for them, because it falls near the low of the first day. After the final day, a sustained downtrend kicks in, and anyone who was working a clever short would be in for some profits.

Figure 10-14:

The bearish abandoned baby pattern comes out a winner on a chart of eBay stock.

Figure 10-14:

The bearish abandoned baby pattern comes out a winner on a chart of eBay stock.

Failing to signal lower prices ahead

Now for a failing bearish abandoned baby. It's a rare occurrence, but it does happen. In this case it happens on a chart (in Figure 10-15) of Xilinx, Inc. (XLNX), a maker of basic semiconductors that go into just about any electronic product you can think of. XLNX has so many ups and downs that I honestly believe you can make a trading career trading only its stock. It's a wild ride.

The bearish abandoned baby appears in Figure 10-15 at the beginning of an uptrend. The pattern has an up first day, followed by a gap opening and a second day with a fairly narrow range. The third day kicks off with a gap down opening, and the gaps on either side of the second day mean that the pattern is in place.

Figure 10-15:

The bearish abandoned baby pattern fails on a chart of XLNX.

Figure 10-15:

The bearish abandoned baby pattern fails on a chart of XLNX.

The signal doesn't hold up for very long. A long white candle occurs just two days after the pattern, invalidating the trend reversal signal. Shorts would be stopped out, and sellers would be disappointed because the price is headed higher in the short term.

Was this article helpful?

0 0

Post a comment