Three Inside UP and DOWN - Three Stars in the South - Three White Soliders

THREE INSIDE UP and THREE INSIDE DOWN

Description

Note that after the long candle day that is in the same direction of the trend that the Harami pattern occurs. (See Figures 2.70 and 2.71.) The Harami is the first indication that they trend has stopped. The third day confirms that the Harami has indicated correctly. The three-day pattern is a modern era confirmation of the Harami pattern.

Criteria

• The Harami pattern is the overriding signal component of this pattern.
• The harami body should be the opposite color of the long candle day.
• Day three has a close that is higher than the open of day one. Or lower than day one in the bearish indicator.

Pattern psychology

After a trend and the occurrence of a long body day that extends that trend, the Harami pattern shows that the trend has stopped. A factor that helps identify the strength of the reversal is how big the Harami is compared to the previous day's body. A body that is relatively large indicates more strength in the opposite direction. Additionally, the magnitude of the strength in day three adds to the potency of the reversal. (See Figures 2.72.)

THREE STARS in the SOUTH

Description

The slow down of the trend is visually obvious (see Figure 2.73). The opposite signal pattern is the Advance Block pattern. The long black body at the end of a downtrend is the first portion of this pattern. The shadow indicates that some buying had presented itself. The next day reveals a deterioration of the selling. The third day is a Marubozu, no shadows. A bullish day following this pattern is good confirmation that the downtrend fizzled and reversed.

Criteria

• The first black candle day has a lower shadow that indicates buying stepping in—almost a Hammer but not quite.
• The second day is like the first but on a smaller scale.
• Day three should be a Marubozu with no shadows. It is within the previous day's trading range.

Pattern psychology

After a downtrend, the daily formations start indicating that buyers are becoming evident. The second day indicates the same message on a small scale. Day three brings movement to a slow process. The bears should now be concerned about their positions. New lows are diminishing rapidly. This gives enough time for the short sellers to start covering their positions. (See Figure 2.74.)

THREE WHITE SOLDIERS

Three White Soldiers Description

The Advancing Three White Soldiers in Figure 2.75 (commonly known as Three White Soldiers) is a healthy market reversal pattern. It consists of three white candles, the second and third candles opening lower than the previous close but closing at a new high.

Criteria

• Each consecutive long candle closes with a higher close.
• The second and third Candlesticks open in the previous day's body.
• Each day should close very near its high for the day.
• The opens should be within the top half of the previous day's body.

Pattern psychology

After a downtrend or a flat period, the presence of this formation suggests a healthy rally to be occurring. The strength of this formation consists of the fact that each day, the lower open suggests that sellers are present. By the end of each day, the buying has overcome the early sellers. This represents that a healthy continued rally has selling occurring as it is happening. As in any rally, too much buying with little selling can be dangerous. (See Figure 2.76.)