Piercing pattern

The “piercing pattern” is a two candlestick formation that shows the potential end of a downtrend. The first candle is a negative candle, as the market is continuing to lose value. However, the second candle begins with a gap lower, which of course signifies that we should continue to sell off. While the candle is being formed though, the buyers push price higher, and above the 50% level of the previous bearish candle. This show signs of exhaustion, and the perhaps the buyers are starting to take over.

Piercing Pattern

Piercing Pattern

Quite often, this will signify that the exhaustion that the sellers are starting to feel is about to overcome the bearish pressure that had been driving the market lower. After all, you have to recognize that there is a bit of a change of psychology for that particular session, as the market turned everything around. Once we break above the top of the first candle, although sellers are now losing money. That becomes a bit of a self-fulfilling prophecy, as more and more sellers will have to scramble to buy the market in order to close their positions out and stop financial losses.

Looking at the chart below, you can see that the market did in fact gapped lower at the open, but then turned back around to overcome 50% of the range from the previous candle. Once we break the top of the first candle, everybody that was selling during that candle is now losing money. This is in fact the signal to start buying.

Piercing Pattern used as a signal.

Piercing Pattern used as a signal.

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