The Cradle Pattern Signals

The Cradle Pattern

A variation of the series of Doji at the bottom is the Cradle pattern. The Cradle pattern is aptly named. It looks like a cradle hanging at the bottom. This rever­sal pattern is easy to identify. It begins with the same visual alert as found in most candlestick bottoming signals; a large bearish candle at the bottom of a downtrend. This illustrates the extensive selling at the bottom. The following day shows a candlestick signal such as a Doji, Spinning Top, Harami, Hammer or Inverted Hammer, indicating that the selling had stopped. What will a candle­stick investor be watching for? Confirmation of the buy signal! However, for a number of days, small indecisive trading days occur. The indecisive trading occurs in a relatively flat trading area.

The Cradle Pattern Description

After an extended downtrend, a large dark candle forms,

1.     A candlestick signal such as a Harami, Hammer or Doji signal indicates that the selling has stopped.

2.    The next three, four, five, or more days reveal indecisive trading.

3.    The confirmation of the Cradle Pattern is a large bullish candle. The large bearish candle acts as the headboard. The large bullish candle acts as the footboard.

4.    The indecision days in between become the ‘sleepy’ days.

5.    The signal pattern is very symmetrical. It illustrates a definite change of investor sentiment after an indecisive trading span. It is a derivative of the series of Doji at the bottom

A bullish candle reveals what investor sentiment decided after the indeci­sive trading period. If the large dark candle is considered the headboard, the bullish candle becomes the footboard. The cradle formation is now hanging at the bottom, implying that the trend should move up from this level.

Fig. 6-26, The Marchex Inc. chart reveals the indecision occurring at the end of an extended downtrend. Notice the stochastics remained in the oversold area for a number of weeks prior to this pattern demonstrating a change of investor sentiment.

Fig. 6-27 (following page), The JDA Software chart exhibits a Cradle pattern. It should be noted that from the appearance of the long dark candle, a head­board, to the appearance of the long bullish candle, numerous candlestick sig­nals could be identified. Doji’s and Spinning Tops illustrated the lack of convic­tion by both the Bulls and the Bears. The important visual aspect of the indeci­sive trading was that price traded completely flat for approximately a two- week period.

Recognizing there was no definitive direction, after the last large dark candle, the candlestick investor can be prepared for the large bullish candle. If watching closely, a position could be established upon seeing strength coming in the day the footboard was forming.

The Cradle pattern, the same as the series of Doji’s at the bottom, demonstrate that the Bulls and the Bears cannot figure out what to do with prices at the bottom. A large bullish candle, completing the Cradle formation, immediately declares where investor sentiment has moved. This is a high probability rever­sal pattern. Any time a series of indecisive trading signals can be identified, the likelihood of a strong trend occurring afterwards is very strong. Once the direc­tion is disclosed, the price move will usually be significant. The elements for making this a successful trade are already in place. After an extended downtrend, the stochastics will be in the oversold condition. A bullish signal, forming after the indecisive signals, becomes your ‘buy alert.’