Bearish Harami

HARAMI

BEARISH HARAMI

Description

The Bearish Harami is the exact opposite of the Bullish Harami. The pattern is composed of a two-candle formation. The body of the first candle is the same color as the current trend. The first body of the pattern is a long body, the second body is smaller. The open and the close of the second body occurs inside the open and the close of the previous day. The appearance of a Bearish Harami indicates that the uptrend has stopped. The uptrend can be extensive or a one- or two-day trend. The Bearish Harami becomes more significant if it occurs at important resistance levels. After a strong up trend has been in effect and after a long white candle day the appearance of a Harami is more significant. Bears open the price lower than the previous close. The longs get concerned and start profit taking. The price finishes lower for the day. The Bulls are now concerned as the price closes lower. It is becoming evident that the trend has been vio­lated. A weak day after that would convince everybody that the trend was reversing. Volume increases due to the profit taking and the addition of short sales.

Criteria

1.    The body of the first candle is white, the body of the second candle is black.

2.   The up trend has been apparent. A long white candle occurs at the end of the trend.

3.   The second day opens lower than the close of the previous day and closes higher than the open of the prior day.

4.   For a reversal signal, confirmation is needed. The next day should show weakness.

Signal Enhancements

1.    The longer the white candle and the black candle, the more forceful the reversal.

2.   The lower the black candle closes down on the white candle, the more convincing that a reversal has occurred, despite the size of the black candle.

If you break down the aspects of the Bearish Harami, it makes understanding why the signal works much easier. Consider what occurs in the formation of a Bearish Harami. After an uptrend has been in progress, the formation of a Harami is inconsistent with the expectations of the uptrend. The first day of the two-day Harami signal is a bullish candle. The bullish candle coincides with the expectations of the price move in an upward trend. The price opens and con­tinues to move higher. The following day, the price opens lower than the previ­ous day’s close. That in itself does not stifle an uptrend.

The factor, not congruent with an up-trending price, is that no further strength is seen in the price move. The lower open may or may not see addi­tional buying during the day. The prices moving lower by the end of the day become the relevant indicator. It becomes obvious that the buying has started waning, especially when stochastics are in an overbought condition. This should be an indication that investor sentiment has taken an obvious turn. Prices opening lower than the previous days close and then continuing to close below the opening price reveals selling pressure.

Fig.2-55, The Cross-Country Healthcare chart illustrates a Harami signal. The probabilities become extremely high that the uptrend is over. Will the Harami signal identify the absolute top in all trends? Definitely not! However, the signal will suggest that the majority of the move is over.

A common Bearish Harami signal involves a Doji. An upward price move fol­lowed by a Doji/Harami signal is easy to interpret, especially when the trading has moved into the overbought condition. A Doji represents indecision. A Harami indicates the buying has stopped.

What is expected after a Doji/Harami? A high likelihood that the sellers may be coming in, as indicated in Fig. 2-56, the Aspen Corporation chart. A lower open following a Doji/Harami confirms the signal. The probabilities are now extremely high that the uptrend has stopped and a downtrend may be starting. The Bearish Harami followed by additional candlestick ‘sell’ signals, such as a Shooting Star and/or Doji should be analyzed as a group scenario. The Bearish Harami provides the initial information. The buying has stopped. The following candlestick signals produce additional confirmation to what the Harami is revealing.

Fig. 2-57, The Fuel Cell Energy Corporation chart provides a clear Harami indi­cator. The uptrend, now shown to be stopped, is experiencing more indications of indecision at these levels. When the stochastics start turning down, it further confirms the buying forces have disappeared.

If one Bearish Harami signal reveals a potential reversal of a trend, then wit­nessing two Bearish Harami’s in close proximity should be clearer confir­mation. The M-Systems Flash Disk Pioneers Ltd. chart reveals simple logic in viewing two Bearish Harami’s at the top.

The first signal illustrates that the buying stopped. After pulling back, the Bulls make another attempt to move the price up, followed by another Bearish Harami. This should become obvious that the Bears knock the prices back down when the bulls try to advance.

Bearish signals were occurring right near a major moving average. The stochastics were starting to roll over, making for an easy analysis. The sellers are starting to take control. This is illustrated in Fig. 2-58, the M-Systems Flash Disk Pioneers Ltd. Chart.