Dark Cloud Candlestick Pattern

“Dark Cloud” is a formation that has two candles, with the first candle being bullish, while the second candle is in fact bearish. The formation is a reversal signal, which of course is based upon the idea of exhaustion. Essentially what happens is that the pair of candles form at the top of an uptrend, and while the second candle gaps higher at the open, the sellers come back in and push prices down. In fact, they break below the 50% level of the previous candle, making sure that more than half of the buyers from the previous candle are now losing money. This shows a significant switch in the psychology of the market in general.

Dark Cloud formation

Dark Cloud formation

This formation is confirmed once you break down below the bottom of the first candle. At this point in time, all of the buyers from the original candle are now losing money and will have to sell their positions in order to stop the losses. This is a self-fulfilling prophecy of sorts, as more and more buyers will have to exit the market, essentially just exacerbating what is already starting to happen.

Looking at the chart below, you can see that the market formed the “dark cloud”, and then two candles later broke down below the bottom of the original formation. Once that happened, you can see that the market did in fact start to sell off and continue going much lower. This was the end of the uptrend, as exhaustion set in, and the sellers once again took over.

Dark Cloud being used as a signal.

Dark Cloud being used as a signal.

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