The Dark Cloud signal is found at the top of an uptrend.
In order for the Bearish Engulfing signal to be valid, the following conditions must exist:
1. The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart.
2. The second day of the signal should be a black candle opening above the high of the previous day and closing more than half way into the body of the previous day’s white candle.
The following Figure shows a Dark Cloud cover formation. After prices have risen for days, there sets in exuberance. The prices gap up but fail to hold. The bears take control and manage to close the stock deep into the previous day’s candle. The half way point here is very important. The Japanese place great emphasis on the half way point (of a tall candle) acting as support or resistance for the stock. If the bears can hold control the day after the Dark Cloud, then the probabilities of a reversal are extremely high.
What signal will be formed if the black candle closes below the open of the previous day’s white candle? -Bearish Engulfing signal.
Notice the Dark Cloud signal in the chart. The signal in this case confirmed the gap resistance.Stochastics were in overbought condition adding more weight to the reversal. Again, when you a multitude of factors accumulating at the same price area, the probabilities are on your side. Take advantage of these signals and the information they convey.