The downside tasuki gap pattern

The downside tasuki gap pattern is the mirror image of a bullish version that you can read about in Chapter 9. Compared to the other bearish three-stick trending patterns in this chapter, this pattern is more useful for you if you're looking to put on a new trade. This is because of the higher closing price that occurs when the close of the third day moves into the gap between the first and second day.

Understanding how to identify the downside tasuki gap pattern

The downside tasuki gap begins with a black candle that appears during a downtrend. The second day sees a gap opening downward and bearish trading that result in a lower closing. When the third day rolls around, however, the bulls show up to push prices higher. They push enough to make the third day an up day with a closing price that's higher than the high of the second day. But don't count on the bullish behavior to continue. The bears are willing to sell within the gap between the first and second days, and they soon stop the bulls in their tracks. Want to see an example? Check out Figure 10-25.

Figure 10-25:

The downside tasuki gap pattern.

Making a trade with the downside tasuki gap pattern

The downside tasuki gap is one of the bearish three-stick trending patterns that makes for a good candidate when you're looking to initiate a short position.

Figure 10-26 is a chart of International Paper (IP). The downside tasuki gap shows up in a downtrend, and coincidentally enough, the action that takes place before and including the first day of the downside tasuki gap is another pattern that I cover in this chapter: the three black crows (see the section, "The three black crows pattern" earlier in this chapter).

The second day of the downside tasuki gap pattern sees a gap down that isn't filled. The third day is an attempt by the bulls to move the price higher, and it stalls very low in the gap between the first and second day. The pattern is then followed by a pretty sustained downtrend.

Because the tasuki gap finishes close to the high of the pattern, you may want to enter on the close of the third day if you're looking to short. In this example, that strategy would've provided you with an excellent short entry before the continuation of the downtrend.

Figure 10-26:

The downside tasuki gap pattern works on a chart of IP.

Figure 10-26:

The downside tasuki gap pattern works on a chart of IP.

Catching the failing trend at the end of the pattern

For my failure example of the downside tasuki gap, I turn to a chart of Harrah's Entertainment (HET). Harrah's operates casinos throughout the United States, and just like gambling in their establishments, trading their stock can be quite exciting because it's an unstable security in an unpredictable industry. The chart appears in Figure 10-27.

Figure 10-27 is a fun example of the downside tasuki gap. If you've read through any of the other examples in this chapter, then you're probably expecting an outright pattern failure, but in this case an exit signal shows up before the pattern fizzles out. An astute user of candlestick patterns may have caught this signal before the trend changed and taken a profit instead of being stopped out for a loss.

Figure 10-27:

The downside tasuki gap pattern (kind of) fails on a chart of HET.

Figure 10-27:

The downside tasuki gap pattern (kind of) fails on a chart of HET.

Tasuki Gap

The first day is a down day at the upper end of the downtrend. This day is followed by a gap down that isn't filled during the day and a down second day. Finally, on the third day of the pattern, a small rally occurs, and prices trade inside the gap, but the gap isn't filled.

Trading after the pattern in Figure 10-27 is interesting, with a few attempted rallies that get into the gap but don't trade over the high of the first day. There's also a drop to new lows, so the price action is really quite varied. Then, after the drop, a bullish reversal pattern shows up!

One more thing to look for in Figure 10-27: I highlight an outside up day — a bullish reversal pattern — that precedes a change to an uptrend. A wise candlestick pattern user would use that as an exit signal or even a chance to put on a long position. On the flip side, a short who isn't looking out for candlestick patterns wouldn't see the writing on the wall and would probably be stopped out in the next few days as prices exceed the pattern's highs.

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