The bearish harami pattern

The bearish harami pattern can tip you off that an uptrend is about to be reversed. Loosely translated from the Japanese, harami means pregnant. If you use your imagination and squint a little, you can see in Figure 8-4 how the pattern got its name. I guess if you draw a line to circle the area that a harami covers, you end up with something that resembles the outline of a pregnant woman. Okay, so it's not going to fetch much at an art auction, but it can pay off if you understand how to identify and trade on it.

Spotting a bearish harami

The setup day of a bearish harami pattern is a continuation of a prevailing uptrend — a strong up day. At first glance, the signal day isn't much to jump up and shout about, either. It's a day where the price action doesn't stray outside of the high and low of the setup day, and it indicates that the bears take over on the open, and neither side makes much progress pushing around the price action. But since this trend occurs after a bullish day and during a marked bullish trend, it can very well serve as a sign that the bears are starting to take control of the price action. Figure 8-4 shows an extremely straightforward illustration of the bearish harami pattern.

Figure 8-4:

The bearish harami pattern.

Another name for the signal day in this pattern is an inside day, where the high is lower than the previous high, and the low is lower than the previous low. When they occur on their own, inside days indicate a lack of conviction by both the bulls and the bears. But combine an inside day with a preceding bullish day and a bullish trend in place, and the combination can show you that the bull run is coming to an end.

When a prevailing trend starts to fade away into indecision, the next dominant trend is likely to go in the opposite direction.

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