Welcome back! Each coin has two sides and so does our stock market. Market experiences its bull and bear runs from time to time. In our last blog, we discussed Bullish Candlestick Patterns and as promised, today, we shall understand Bearish candlestick patterns. Bearish reversal patterns indicate a change in direction of a financial instrument from an uptrend to a downtrend. So, let’s dive in and understand 3 major candlestick patterns that show bearish sentiment.
- Bearish Marubozu candlestick pattern.
- Bearish Engulfing candlestick pattern.
- Evening Star candlestick pattern.
1. Bearish Marubozu:
Marubozu is a single candlestick pattern. This pattern does not have an upper and lower shadow or has very small shadows. For a candlestick to qualify as a Bearish marubozu, only the body (red) of the candle must exist and it needs to have a significant length. This means that open = high and close = low of that day.What does it tell you?
A bearish Marubozu indicates that sellers were ready to sell an instrument at every possible price between the days’ range i.e., between high and low. This suggests that the sellers were more desperate to sell the instrument during the day which in turn pushed the price down, due to high supply. A bearish Marubozu appearing at the end of an uptrend signals a possible bearish reversal in the next few trading sessions. If it appears in a downtrend, it indicates that the trend will continue.
Example:
Below is the daily chart of Castrol India. On 16th May 2017, we can see a bearish marubozu appearing at the end of an uptrend. The stock opened at 225.95 which is similar to its high. It closed at 221.50. Post that we can see that the stock moved in a downtrend for the next few trading
2. Bearish Engulfing:
Bearish engulfing is a 2 candlesticks pattern. The first candle must be bullish (green) and the second candle must be bearish (red). The second candle must be bigger and engulf or cover the first candle completely. The bigger the second candle, the higher will be the bearishness. It is important to note that the second candles’ body should engulf the previous candles’ body. If the previous candle is engulfed along with its shadows, it shows more strength in bearishness. This pattern should appear at the end of an uptrend.
What does it tell you?The second candles open is higher than the close of the first candle in expectation of more bullishness. However, the high selling pressure pushes the price to close below the opening price of the previous candle. This way the second candle ends up engulfing the previous candle. Hence, a bearish engulfing pattern is formed indicating that the sellers have taken the charge and signals a bearish trend in the next few trading sessions.Example:
Below is the daily chart of Hindalco Industries. On 25th July 2014, the bearish engulfing pattern was formed with above-average volume. The first green candle opened at around 194.20 and closed at 198. The next day's opening was at 198.90 and went down to close at 191.80. Post that we can see that the stock moved in a downtrend for the next few trading sessions.
3. Evening Star:
The evening star is a 3 candlesticks pattern. The first candle should be bullish (green). The second candle would be a Doji/Spinning top and will open and close above the previous candle. The third candle will open below the second candles’ close and because of huge selling interest, it will close below the first candles’ open/low covering it completely. This pattern should appear at the end of an uptrend. Confused right? Don’t worry, read on, it is very simple.
What does it tell you?
The first and second candles follow the previously existing uptrend. The second candle has a gap-up opening indicating bullishness. However, this candle forms a Doji/ spinning top pattern which indicates indecision in the market. It means there was a tough fight but neither buyers nor sellers could win on this day to establish a trend. Then comes the third candle showing bearishness and manages to close below the first candles’ open/low. This gives a strong signal to the market that the sellers/bears are taking over and the trend will continue for the next few trading sessions.
Example:Below is the daily chart of Adani port. On 21st May 2013, it completed an evening star pattern. The first candle opened at 156.90 and closed at 162.50 following the bullish trend. On the second day, a spinning top is formed with a gap up open at 163.30 and closed around 161. On the third day, the stock opened at 161.25, a gap down opening, and plunged to close at 154.45 which is lower than the first candles’ opening price. Post that we can see that the stock moved in a downtrend for the next few trading sessions.
Bottom line:
Candlestick patterns are one way of identifying trend reversals. However, by adding up other parameters like volumes, MACD, RSI, support/resistance levels, etc. you get stronger confirmations regarding the same. This will help you to weed out false reversals, breakouts etc. If technical analysis intrigues you, make sure you click on the link to check out my course where I have explained more such patterns, indicators, and strategies in the most simplified way. Until next time!
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