Dark Cloud Cover

DARK CLOUD COVER(Kabuse)

Description

The Dark Cloud Cover is the bearish counterpart to the Piercing pattern. It gets its name from the ominous dark candle that is formed after a nice bright uptrend. The first day of the pattern is a long white candle at the top end of a trend. The second day’s open price is higher than the high of the previous day. It closes at least one-half the way down the previous day’s candle. The further down the white candle, the more convincing the reversal. ‘Kabuse’ means to get covered or to hang over.

The Piercing Pattern has almost the same characteristics as a bullish en­gulfing signal. Likewise, the Dark Cloud signal has almost the same character­istics as the Bearish Engulfing signal. The difference is that a Dark Cloud is formed as it opens higher than not only the previous day’s close of the white candle, but it gaps up above any of the previous day’s trading range.

The gap up becomes the first alert indicating that a candlestick sell signal is in the making. The exuberant buying at the top should be viewed with suspi­cion. Once the selling has occurred, it continues into the close. As the Piercing Signal requires a close more than halfway up into the previous day’s black candle, a Dark Cloud signal requires a close below the halfway point of the last white candle. The same parameters enhance the credibility of a Dark Cloud as seen in the Piercing signal. The higher the gap-up open, the higher the prob­ability a downtrend is in progress and the greater the potential force of the downtrend. The further the close comes below the midway point of the previ­ous day’s candle, the stronger the downward trend should be. Once again, like the Piercing Signal parameter, a Dark Cloud signal requires a close below more than the midway point of the previous bullish candle.

Criteria

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

2.    The up-trend has been evident for a good period. A long white candle occurs at the top of the trend.

3.    The second day opens higher than the trading of the prior day.

4.    The black candle closes more than half-way down the white candle.

Signal Enhancements

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

2.    The higher the gap up from the previous day’s close, the more pronounced the reversal.

3.    The lower the black candle closes into the white candle, the stronger the reversal.

4.    Increased volume during these two trading days is a significant confirma­tion.

A Dark Cloud signal is not difficult to spot. Keep in mind the very simple rules that established a Dark Cloud signal. A gap up above the previous day’s trading and closing well into the last bullish candle forms a signal that clearly indicates an uptrend is over.

Fig. 2-47, The American Tower Corp. chart has a nice uptrend in progress for a month and a half. It started at a major moving average with a Morning Star signal. The top was clearly illustrated with a dark candle that showed a change of investor sentiment.

The trends in Fig. 2-48, the Brightpoint Inc. chart showed signs of weakness in mid-June with a bearish candle. However, that bearish candle was not a rever­sal signal. When the Dark Cloud signal was formed a couple days later, the fact that some weakness had occurred a few days prior made the Dark Cloud signal that much more significant. Although all candle formations are not signals, the interpretation of surrounding candles in overbought or oversold conditions can add credibility to the actual candlestick signal when it is formed.

Notice how the Dark Cloud formed twice in Fig. 2-49, the AirT Inc. chart. The first Dark Cloud signal produced a very good indication that the breakout in price was now over. A few days later the second attempt to take the price of the stock back up was also stifled by the appearance of a second Dark Cloud. Simple visual observation, observing two Dark Cloud signals, in close proximity of each other, should have made it apparent that the sellers had stopped the uptrend.

Use the dark candle signal to prepare to take profits or be ready to estab­lish short positions. The Dark Cloud signal lives up to its name. It does cast a dark cloud over nice up-trends. What other investors are ‘hoping’ for, a contin­ued upward move in prices, the candlestick investor can visually evaluate. The probabilities an uptrend is over when a Dark Cloud signal forms, takes the emotion out of an investment decision.