The bearish meeting line

Although rare, the bearish meeting line pattern is worth understanding as you build your arsenal of double-stick bearish patterns that signal a trend reversal. This line can be a clear indication of a change in trend due to the stark contrast of the two days that combine to form the pattern.

Figure 8-14:

A bearish doji star pattern working on a chart of INTC.

Figure 8-14:

A bearish doji star pattern working on a chart of INTC.

Figure 8-15:

The bearish doji star pattern fails on a chart of AAPL stock.

Figure 8-15:

The bearish doji star pattern fails on a chart of AAPL stock.

Understanding how to identify the bearish meeting line

If you're looking for an ideal visual representation of the bearish meeting line, it doesn't get any better than Figure 8-16.

Figure 8-16:

A straightforward example of the bearish meeting line pattern.

On the setup day of the bearish meeting line, as with most of the two-day bearish patterns, you see a strong up day. Then, on the signal day, you notice a gap opening, which quickly entices some sellers. The selling continues until the close. A long black candle is the result, with the close of the day being very near its low. The close of the signal day also happens to be very near the close of the setup day, and the meeting of these lines gives the pattern its name.

Trading on the bearish meeting line

For an example of the bearish meeting line pattern producing a scenario that's ripe for a successful trade, see Figure 8-17. That's a chart of the aluminum maker Alcoa (symbol AA). As a producer of a material used in many everyday products, Alcoa is another stock that has strong ties to the overall economy. AA is a volatile stock at times, creating both long and short opportunities.

A definite uptrend exists on this chart — the first criteria for keeping any eye out for a bearish reversal signal. The setup day is a very nice up day, and then the signal day opens with a gap higher. The bulls are ruling the trading activity, and the situation is perfect for a successful bearish meeting line pattern.

If you were watching this pattern develop, you'd be pleased to see that sellers come in and push prices lower than the previous day's close, and although the stock rebounds a little, the price settles on the signal day near where the stock closed on the setup day.

Figure 8-17:

A bearish meeting line pattern that turns out well on a chart of AA.

Figure 8-17:

A bearish meeting line pattern that turns out well on a chart of AA.

Then the trend reversal begins. And what a trend reversal it is! Six black candles line up in a row, signaling that the uptrend has definitely ended. Any trader not prepared on the day the signal was completed misses out on a good part of the outstanding downtrend.

To get in on the close of a day that a pattern is completed, watch for the patterns as they develop during a trading day. Usually, with five to ten minutes left in a trading day, you can tell whether a pattern is forming or not. The problem for you if you're a new or part-time trader is that you probably have a job or other responsibilities that may prevent you from being available to trade during these important time periods. Be sure to factor in your own availability when developing your trading strategy.

An unsuccessful bearish meeting tine

An example of the bearish meeting lines failing to signal an uptrend reversal appears in Figure 8-18, which is a chart of the futures contract that trades on the level of the Euro currency versus the U.S. dollar. The uptrend is in place, and the formation appears as it should. This pattern is very encouraging for a trader who's been waiting for a good time to short. In this example, however, that enthusiasm from a short seller is fleeting.

The day that follows the pattern proves it to be invalid. Prices trade higher than both the open and the high of the pattern's signal day, making it clear that the pattern is a bust.

When shorting based on the bearish meeting line pattern, I usually place my stops on either the high of the signal day or the open of the signal day.

Figure 8-18:

The bearish meeting line pattern fails on a chart of Euro currency futures.

Figure 8-18:

The bearish meeting line pattern fails on a chart of Euro currency futures.

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