The bearish piercing line or dark cloud cover pattern

Another two-day bearish reversal pattern is the bearish piercing line, also known as the dark cloud cover, because some say that the signal day is an ominous dark cloud that hangs over the setup day. It requires a little use of your imagination.

Identifying the bearish piercing line pattern

You can see a straightforward illustration of the bearish piercing line in Figure 8-19. Just like all the bearish two-stick reversal patterns I describe in the preceding sections of this chapter, this pattern must appear in an uptrend. Also, in keeping with the other bearish reversal patterns, the setup day for the bearish piercing line is a bullish day. The signal day is a long black candle with an opening that's higher than the setup day's high. The signal day indicates that some sellers came rushing in, pushing prices down through the setup day's opening price and below its midpoint.

Making trades based on the bearish piercing line

The bearish piercing line pattern can be used to put on a profitable short, as you can see in Figure 8-20. This chart shows the bearish piercing line on a chart of Intel (INTC).

The pattern occurs in what appears to be the late stages of an uptrend. The price is still working higher, but not with as much momentum as it did where I've pointed out the first stage of the uptrend. If you see a reversal pattern when you believe a trend is starting to lose steam, that's more encouraging than when the pattern appears in a strong trend. In later chapters I discuss how to use indicators to make these distinctions (see Chapters 11, 14, and 15).

Figure 8-19:

The bearish piercing line pattern.

Figure 8-20:

The bearish piercing line pattern at work on a chart of INTC.

Figure 8-20:

The bearish piercing line pattern at work on a chart of INTC.

Falling short with the bearish piercing line

This INTC chart is another example of the limited amount of time you may have for initiating certain trades. Unless you keep a close eye on the chart, you miss your chance to put on a successful short. So what does a bearish piercing line pattern look like when the pattern fails? For an answer, see Figure 8-21.

Figure 8-21:

The bearish piercing line pattern fails on a chart of DELL.

Figure 8-21 shows a chart of the stock for another technology company, Dell Inc. (symbol DELL), which was founded by Michael Dell. (Maybe I'm too focused on the market, but how cool would it be to have your name become a stock symbol?) Here you can see a bearish piercing line that occurs during an uptrend. The uptrend continues on, and the failure of the pattern (and the appearance of higher prices) takes a couple of days. If you jump the gun on this pattern and put on a short without a smart stop, you see some losses.

Figure 8-21 shows a chart of the stock for another technology company, Dell Inc. (symbol DELL), which was founded by Michael Dell. (Maybe I'm too focused on the market, but how cool would it be to have your name become a stock symbol?) Here you can see a bearish piercing line that occurs during an uptrend. The uptrend continues on, and the failure of the pattern (and the appearance of higher prices) takes a couple of days. If you jump the gun on this pattern and put on a short without a smart stop, you see some losses.

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