FXCM Insights

Chart Patterns: Dark Cloud Cover

What Is Dark Cloud Cover?

Dark cloud cover is a Japanese candlestick charting pattern that aids technical traders in identifying the exhaustion of bullish price action. Classified as a bearish reversal pattern, dark cloud cover is commonly seen as a signal of an exhausted uptrend, or the end of bearish trend retracement.

Depending upon the pattern’s location within the context of a trending or consolidating market, it can serve as an indicator of long-term market reversal or bearish trend continuation.

The formation can be implemented on many different financial products or time frames. Typically, it’s used on the daily time frame, but it can be utilised on an intraday or long-term basis.

Constructing Dark Cloud Cover

In order for the dark cloud cover charting pattern to exist, the following elements and conditions must be present and satisfied:

Applications Of Dark Cloud Cover

The predictive value of dark cloud cover depends upon several unique characteristics of the pattern itself. First, the size of the negative candlestick plays a key role in determining the probability of selling pressure becoming the dominant form of price action. As the negative candle overlaps more of the initial candle’s body, the strength of the selling is deemed stronger and the probability of confirmation becomes larger.

Also, the location of the pattern within the context of the overall market state lends validity to the chance of a directional move. For instance, if the pattern forms during the retracement of a strong downtrend, then the possibility of the trend extending becomes very real.

However, in the event that the dark cloud cover formation occurs at the extreme top of a buying trend, then the possibility of market reversal comes into play. In this scenario, the pattern is viewed as sign of bearish intervention. Rejection of the previous gap up in pricing, coupled with confirmation, can be a precursor to a longer-term change in market direction.

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