Bearish Harami

Bearish Harami properties

The next line is going to be rather predictable, I fear. The opposite of a Bullish Harami is... can you guess? Yes indeed! Go to the top of the class! A Bearish Harami.

As you can see from our box on the previous page, it has all of the rules of the Bullish Harami but in reverse; this time a small red real body sits within the green real body prior to it.

In other words, day one was good for the bulls, and when you consider that we’re in an uptrend this is no big shock to anyone. The weak open on the second day of our pattern is the first sign that the market may be struggling at these levels. The Bulls don’t react to this weak open on this particular day. Often weakness in an uptrend is pounced upon as a buying opportunity by the bulls, if they’re in a dominant mood. But that doesn’t happen on this occasion. Instead the market does pretty much nothing, and ends the day within the real body of the previous session.

We’re not worried about the shadows on this pattern, remember, we’re only concerned with the position and size of the second real body, which must be a “baby” contained within the “mother” candle before it. 

The reason why this is classed as a reversal is because the second session is a pathetic effort after all that’s gone before. Usually it’s accompanied by a failure to make a new high as well, and generally we’d ask for a bit more confirming price action subsequently before acting upon it.

If I were forced to give pattern star ratings based on my personal experience across all markets and time frames this one would score pretty lowly, although as I mentioned earlier this is not a game I like to play.

Figure 4-10: British Energy pic; daily candlestick chart; 15 November 2007 - 29 January 2008, showing Bearish Harami on 8/9 January 2008

If you looked back at the previous price history of this stock you would instantly have seen that £6.00 was a strong resistance level, so seeing a Harami when approaching this level would have piqued interest at least.

This wasn’t the top on this occasion, as there were some decent gains the next day, when the market got through 600 to print 607, but on this day the gains were sold into and the session ended back near the lows, posting a Shooting Star. This was engulfed the next day with a big red candle. I’ve never quite decided what the collective noun for candlestick reversals should or could be, but I’d certainly be using it in this case. We have a gaggle of reversal patterns, a sloth of bears, a cacophony of noise arguing in favour of further downside, and the market duly obliged.

Spotting the Harami pattern would have given you an early hint that something was amiss, and with each day that another negative candlestick was posted our conviction increased. Once 5.50 cracked just one week after our Harami the market dropped another 85 pence in five days.

You were ready for this sort of move, and the Harami meant you’d “geared up” earlier than you might have done without it. So it wasn’t a definitive reversal signal, but it still did a job for us.

The psychology behind the Harami is that the market opened weaker on the second day, immediately putting doubt into people’s minds. As is customary in a strong uptrend, this weakness was not bought into. While it’s fair to say the bears didn’t exactly weigh in and change the entire landscape, there’s still been a subtle change in the balance of power, with no one dominating the second day.

Bearish Harami summary

The Bearish Harami warns of a market topping out. It is constructed of two candles. The second candle has a filled real body, usually quite small, contained within the open real body before it.

It isn’t one of my favourite patterns but can serve to set off a few alarm bells, which can be useful particularly if you’re in a trade and wondering where or when to take some profit.

Candlesticks don't have to be a "black and white" signal generating tool!

This is something I often try to get across to people about candlesticks, especially people who want to be completely definitive about this sort of thing. There have been many studies done on technical analysis and candlesticks, and they always “do the stats”. For example, you see a pattern and you buy it the next day and you run it for n number of days. If you did this with Harami patterns the results would probably be abysmal. If you did it with something supposedly more potent like Shooting Stars the results would almost certainly still be ordinary, if not disastrous.

The point I’m trying to get across right now though is that they don’t have to be treated in this way at all. You can simply use candlesticks to give you a better understanding of the balance of power between bulls and bears at any particular moment, and you can use candlestick reversal patterns to set off alarms that maybe a move is running out of steam. At least then you’ll be ready for a turn around.

It’s so easy as a trader, and a chartist, to get married to a position, a trade or a trend. If you’re making good money on something it’s so easy to get carried away with the idea that it’s going to last forever. This simply isn’t going to be the case, and you don’t want to maintain your long position all the way back down. Maybe something like a Bearish Harami reversal can jog you out of thinking that the market’s going to go up for ever and always, and can have you getting ready to jump out of a position earlier than you normally would, before you give too much back.