Continued Discussion on a Potential Continuation Pattern – Japanese Candlesticks (Pt 2 of 2)

Tom Gentile

Posted in Technical Analysis

By: Tom Gentile on October 14th, 2022 • 3 mins read

Read Part 1 here

Yesterday we spoke that one possibility got the equities markets is they open up at or a bit above where they closed and continued to run higher. That DID NOT happen

Another prospective situation would be it opens up and trade within the previous days bullish candle body. THAT didn’t exactly happen either.

What we were looking at was the prospect of a ‘Rising Three Methods’ pattern eventually happening.

Rising Three Methods Pattern

This is  a 5-day pattern. It is a bullish continuation pattern that appears in an ongoing uptrend.

The Rising three methods pattern consists of five candles. where the first and last candles are long and bullish, and it has three smaller bearish candles, (real bodies), in between.

Figure 1: Rising Three Methods Pattern
Figure 1: Rising Three Methods Pattern

This is a bit tricky to talk about from the perspective the markets (SPY being used for this education), is not in a bullish trend, so this pattern would be more or less happening at the end of a bearish run.

Note the day gapped higher, but then had a bearish reversal, (at the time of this writing, which is in the last hour and a half of trade today, October 14, 2022).

A truer Rising Three Methods pattern has all three bearish days in between the two bearish confined within the range of the first bullish day in the pattern. 

If today closes where it is; down on the day, AND these past two days were taking place at the end of an uptrend or at resistance once can consider this a bearish reversal pattern called a ‘Dark Cloud Cover.’

Figure 2: Dark Cloud Cover
Figure 2: Dark Cloud Cover

This is not technically a Dark Cloud Cover as that pattern is valid if it is at the end of an ‘Up Trend’ or resistance.

Right now, we wait.

This may or may not resolve itself as a market bottom. It may or may not resolve itself as a bullish trend to come.

It would have been ideal for it to open within the previous bullish day real body. It did not. It gapped higher and reversed.

Should it consolidate over the next couple of days and trade within that bullish real body of yesterday we will see if a fifth day comes about where that last bullish day in the pattern trades with a longer range and it closes above the close/high of the first bullish day of the pattern.

Here’s What Happens Sometimes with Technical Analysis

Because todays day of trade did not trade within the bullish real body of yesterday is one thing that keeps this from being a pure Rising Three Methods pattern.

That happens in trading and in technical analysis.

You will identify a pattern that ‘MAY’ be forming. You know what it looks like it ‘could’ be and anticipate the pattern playing out in the coming trading days. If it does great! Dig further in to how you and your broker wants to trade it.

If it doesn’t be prepared to either pay no more attention to it or see what pattern DOES form on it eventually and work on your trade idea at that point.

Figure 3: Last Trading Days SPY with Japanese Candles (2022/10/14)
Figure 3: Last Trading Days SPY with Japanese Candles (2022/10/14)

The markets may continue to soften and there may be a bearish options opportunity you wish to pursue. That seems like a reasonable approach to us but know we are also keeping an eye on if the price of SPY holds the low of the first day in the pattern and eventually finds itself resuming a move to the upside.

App: Toms Option Tools

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Other times I will have other charts may work to amplify my educational points. 

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