. The first day is a long day.
2. The second day gaps in the direction of the previous trend.
3. The second day is a Doji.
The bullish Doji Star reduces to a long black candlestick, which does notsupport the bullishness of the pattern (Figure 3-32). The bearish Doji Starreduces to a long white candle line, which puts it in direct conflict with thepattern (Figure 3-33). These breakdown conflicts should not be ignored.
Chapter 3
Related PatternsThe Doji Star is the first two days of either the Morning or Evening DojiQtar
Reversal Candle PatternsF| ure 5 34B
9
'
Chapter 3
Reversal Candle Patterns
Morning Star and Evening Star(sankawa ake no myojyo and sankawa yoi no myojyo)No confirmation is required.
Figure 3-35
Figure 3-36
Rules of Recognition1. The first day is always the color that was established by the ensuing trend. That is, an uptrend will yield a long white day for thefirst day of the Evening Star and a downtrend will yield a blackfirst day of the Morning Star.2. The second day, the star, is always gapped from the body of thefirst day. It's color is not important.3. The third day is always the opposite color of the first day.
4. The first day, and most likely the third day, are considered longdays.
Commentary
Scenarios and Psychology Behind the Pattern
Morning Star
Morning Star
The Morning Star is a bullish reversal pattern. Its name indicates that itforesees higher prices. It is made of a long black body followed by a smallbody which gaps lower (Figure 3-35). The third day is a white body thatmoves into the first day's black body. An ideal Morning Star would havea gap before and after the middle (star) day's body.
A downtrend has been in place which is assisted by a long black candlestick. There is little doubt about the downtrend continuing with this type ofaction. The next day prices gap lower on the open, trade within a smallrange and close near their open. This small body shows the beginning ofindecision. The next day prices gap higher on the open and then close
much higher. A significant reversal of trend has occurred.
Evening starThe bearish counterpart of the Morning Star is the Evening Star. Since theEvening Star is a bearish pattern, it appears after, or during, an uptrend.The first day is a long white body followed by a star (Figure 3-36). Remember that a star's body gaps away from the previous day's body. Thestar's smaller body is the first sign of indecision. The third day gaps downand closes even lower completing this pattern. Like the Morning Star, theEvening Star should have a gap between the first and second bodies andthen another gap between the second and third bodies. Some literaturedoes not refer to the second gap.
Evening StarThe scenario of the Evening Star is the exact opposite of the Morning Star.
Pattern FlexibilityIdeally there is one gap between the bodies of the first candlestick and thestar, and a second gap between the bodies of the star and the third candlestick. Some flexibility is possible in the gap between the star and the thirdday.
Reversal candle Patterns
Chapter 3If the third candlestick closes deeply into the first candlestick's realbody, a much stronger move should ensue, especially if heavy volumeoccurs on the third day. Some literature likes to see the third day closemore than halfway into the body of the first day.
The Morning Star reduces to a Paper Umbrella or Hammer line, whichfully supports the Morning Star's bullish indication (Figure 3-37). TheEvening Star pattern reduces to a Shooting Star line, which is also abearish line and in full support (Figure 3-38).
Related PatternsThe next few patterns are all specific versions of the Morning and EveningStars. They are the Morning and Evening Doji Stars, the Abandoned Baby,and the Tri Star.
ExamplesFigure 3-39A
Chapter 3
Reversal Candle Patterns
Figure 3-39B
CommentaryRemember from the discussion of the Doji Star that a possible reversal oftrend is occurring because of the indecision associated with the Doji. DojiStars are warnings that the prior trend is probably going to at least change.The day after the Doji should confirm the impending trend reversal. TheMorning and Evening Doji Star patterns do exactly this.
Morning Doji StarA downtrending market is in place with a long black candlestick which isfollowed by a Doji Star. Just like the regular Morning Star, confirmationon the third day fully supports the reversal of trend. This type of MorningStar, the Morning Doji Star (Figure 3-40), can represent a significant reversal. It is therefore considered more significant than the regular MorningStar pattern.
Evening Doji star
The Morning and Evening Doji stars(ake no myojyo doji bike and yoi no myojyo doji bike minamijyuji set)No confirmation is required.
A Doji Star in an uptrend followed by a long black body that closed wellinto the first day's white body would confirm a top reversal (Figure 3-41).The regular Evening Star pattern has a small body as its star, whereas theEvening Doji Star has a Doji as its star. The Evening Doji Star is moreimportant because of this Doji. The Evening Doji Star has also been referred to as the Southern Cross.
Figure 3-41
1. Like many reversal patterns, the first day's color should representthe trend of the market.2. The second day must be a Doji Star (a Doji that gaps).
3. The third day is the opposite color of the first day.
Reversal candle Patterns
Chapter 3
Scenarios and Psychology Behind the Pattern
Examples
The psychology behind these patterns is similar to those of the regularMorning and Evening Star patterns, except that the Doji Star is more of ashock to the previous trend and, therefore, more significant.
Figure 3-44A
Pattern FlexibilityFlexibility may occur in the amount of penetration into the first day's bodyby the third day. If penetration is greater than 50 percent, this pattern hasa better chance to be successful.
The Morning Doji Star reduces to a Hammer pattern (Figure 3-42) and onoccasion will reduce to a Dragonfly Doji line. The Evening Doji Starreduces to a Shooting Star line (Figure 3-43) and occasionally to a Gravestone Doji line. The closer the breakdown is to the single Doji lines, thegreater the support for the pattern, because the third day closes further intothe body of the first day.
Related PatternsYou should be aware that this pattern starts with the Doji Star. It is theconfirmation that is needed with the Doji Star and should not be ignored.
Chapter 3
Reversal Candle Patterns
CommentaryAnother major reversal pattern that is similar in format to the family ofMorning and Evening Star patterns is the Abandoned Baby pattern. Thispattern is almost exactly the same as the Morning and Evening Doji Starpattern with one important exception. Here, the shadows on the Doji mustalso gap below the shadows of the first and third days for the AbandonedBaby bottom (Figure 3-45). The opposite is true for the Abandoned Babytop (Figure 3-46), the Doji must completely (including shadows) gapabove the surrounding days. The Abandoned Baby is quite rare.
Rules of RecognitionI
1. The first day should reflect the prior trend.2. The second day is a Doji whose shadows gap above or below theprevious day's upper or lower shadow.3. The third day is the opposite color of the first day.4. The third day gaps in the opposite direction with nQ-Shad£BKS-Over-
lapping.
Abandoned Baby(sute go)No confirmation is required.Figure 3-45
Scenarios and Psychology Behind the PatternFigure 3-46
Like most of the three day star patterns, the scenarios are similar. Theprimary difference is that the star (second day) can reflect greater deterioration in the prior trend, depending on whether it gaps, is Doji, and so on.
Pattern Flexibility
\
Because of the specific parameters used to define this pattern, there is notmuch room for flexibility. This is a special case of the Morning andEvening Doji Stars in which the second day is similar to a traditionalisland reversal day.
65
Reversal Candle Patterns
The breakdown of the Abandoned Baby patterns, both bullish and bearish,are extensions of the Morning and Evening Doji Stars (Figures 3-47 and3-48). The bullishness or bearishness is further amplified because the longshadow is usually longer than in the previous cases. As before, the morethat the third day closes into the first day's body, the closer these breakdowns are to the Dragonfly and Gravestone Doji lines.
Related PatternsThis is a special case of the Doji Star in that the Doji day gaps from theprevious day. This gap includes all shadows, not just the body. The thirdday gaps also, but in the opposite direction.
Chapter 3
The Tri Star patterns break down into Spinning Tops which are indicativeof market indecision (Figures 3-52 and 3-53). This is somewhat of a conflict with the Tri Star pattern and supports the notion that because thispattern is so rare, it should be viewed with some skepticism.
Related PatternsBased on the previous discussions, you can see what a rare pattern this is.
Reversal candle Patterns
Figure 3-54B
Chapter 3
Reversal Candle Patterns
3. A second black day opens above the first black day and closesbelow the body of the first black day. Its body engulfs the firstblack day.
4. The close of the second black day is still above the close of thelong white day.
Scenarios and Psychology Behind the PatternOke the beginning of most bearish reversal patterns a white body dayoccurs in an uptrend. The next day opens with a higher gap, fails to rallyand closes lower forming a black day. This is not too worrisome becauseit still did not get lower than the first day's close. On the third day pricesagain gap to a higher open and then drop to close lower than the previousday's close. This closing price, however, is still above the close of thewhite first day. The bullishness is bound to subside. How can you havetwo successively lower closes and still be a raging bull?
CommentaryThis pattern only occurs in an uptrend. As with most bearish reversalpatterns, it begins with a white body candlestick. The gap referred to in thename of this pattern is the gap between, not only the first and second days,but also the first and third days. The second and third days are black whichis where the two crows originate.The third day (second black day) should open higher and then closelower than the close of the second day. The third day, even though closinglower than the second day, still is gapped above the first day. Simply said,the second black day engulfs the first black day.
Rules of Recognition1. An uptrend continues with a long white day.
2. An upward gapping black day is formed after the white day.
Pattern FlexibilityThe Upside Gap Two Crows pattern is fairly rigid. If the third day (secondblack day) were to close into the white day's body, the pattern wouldbecome a Two Crows pattern (discussed later in this chapter).
Reversal Candle Patterns
Chapter 3
The Upside Gap Two Crows pattern reduces to a candle line whose whitebody is slightly longer than the first day's white body and has a long uppershadow (Figure 3-56). The fact that this is not exactly a bearish candle linesuggests that some further confirmation is required before acting on thispattern.
Related PatternsA failure of the third day's black body to open slightly below the secondday's open and remain above the first day's body could lead to thispattern's becoming a Mat Hold continuation pattern. The Mat Hold is abullish continuation pattern discussed in the next chapter. Also, the firsttwo days of this pattern could become an Evening Star, depending uponwhat happens the third day.
ExampleFigure 3-57
Chapter 3
Reversal Candle Patterns
Bearish Meeting LineAn almost opposite relationship exists for the bearish Meeting Line relative to the Dark Cloud Cover. The bearish Meeting Line (Figure 3-59)opens at a new high and then closes at the same close of the previous day,while the Dark Cloud cover drops to below the midpoint.
Rules of Recognition1. Two lines have bodies that extend the current trend.
2. The first body's color always reflects the trend: black for downtrends and white for uptrends.3. The second body is the opposite color.4. The close of each day is the same.
5. Both days should be long days.
CommentaryMeeting Lines are formed when opposite-colored candlesticks have thesame closing price. Some literature refers to Meeting Lines as Counterattack Lines. Deaisen means lines that meet and gyakushusen means counteroffensive lines.
Bullish Meeting LineThis pattern normally occurs during a decline. The first day of this patternis a long black candlestick (Figure 3-58). The next day opens sharplylower and puts the downtrend into a promising position. The bullish Meeting Line is somewhat similar in concept to the bullish Piercing Line, withthe difference being the amount the second day rebounds. The MeetingLine only rises up to the first day's close while the Piercing Line's secondday goes above the midpoint of the first day's body. The bullish MeetingLine is not as significant at the Piercing Line. Also, do not confuse thiswith the On Neck Line covered in Chapter 4.
Scenarios and Psychology Behind the PatternBullish Meeting LineThe market has been in a downtrend when a long black day forms, whichfurther perpetuates the trend. The next day opens with a gap down, thenrallies throughout the day to close at the same close as the previous day.This fact shows how previous price benchmarks are used by traders: theodds are very good that a reversal has taken place. If the third day openshigher, confirmation has been given.
Pattern FlexibilityThe Meeting Line pattern should consist of two long lines. However, manytimes the second day is not nearly as long as the first day. This doesn't
Reversal candle Patterns
Chapter 3
seem to affect the pattern's ability; confirmation is still suggested. It is alsobest if each day is a Closing Marubozu.
EX3fflPleSFigure 3-62A
The Meeting Lines break down into single candle lines that offer no sup- jjport for their case (Figure 3-60 and 3-61). The single lines are similar tothe first line in the pattern, with a shadow that extends in the direction ofthe second day. Again, the breakdown neither confirms the pattern norindicates lack of support.
Related PatternsSomewhat opposite in appearance are the Separating Lines, which arecontinuation patterns. One can also see the potential for these lines tobecome a Dark Cloud Cover or a Piercing Line, if there is any penetrationof the first body by the second.
Reversal candle Patterns
Belt Hold(yorikirf)Confirmation is required.
Belt Hold lines are also opening marubozu lines (Chapter 2). Rememberthat the opening marubozu does not have a shadow extending from theopen end of the body. The bullish Belt Hold (Figure 3-63) is a whiteopening marubozu that occurs in a downtrend. It opens on the low of theday, rallies significantly against the previous trend, and then closes near itshigh but not necessarily at its high. The bearish Belt Hold (Figure 3-64) isa black opening marubozu that occurs in an uptrend. Similarly, it opens onits high, trades against the trend of the market, and then closes near its low.Longer bodies for Belt Hold lines will offer more resistance to the trendthat they are countering.Belt Hold lines, like most of the single day patterns lose their importance if there are many of them in close proximity. The Japanese name ofyorUdri means to push out. Steve Nison coined the name of Belt Hold.
Rules of Recognition1. The Belt Hold line is identified by the lack of a shadow on one end.
Reversal candle Patterns
Chapter 3
2. The bullish white Belt Hold opens on its low and has no lowershadow.
3. The bearish black Belt Hold opens on its high and has no uppershadow.
Scenarios and Psychology Behind the PatternThe market is trending when a significant gap in the direction of trendoccurs on the open. From that point, the market never looks back: allfurther price action that day is the opposite of the previous trend. Thiscauses much concern and many positions will be covered or sold, whichwill help accentuate the reversal.
Pattern FlexibilitySince this is single candle line pattern, there is not much room for anyflexibility. It should be a long day. Remember, a day is considered long inrelation to the previous few days only.
Pattern BreakdownSingle candle line patterns cannot be reduced further.
Related PatternsThe Belt Hold pattern is the same as the Opening Marubozu, discussed inChapter 2. Like the Marubozu, the Belt Hold will form the first day ofmany more advanced candle patterns.
ExamplesFigure 3-65A
chapter 3Figure 3-65B
Reversal Candle Patterns
Is unique Three River Bottom(sankawa soko zukae)Bullish reversal pattern.Confirmation is not required, but is suggested.
% Figure 3-66
CommentaryAs demonstrated by Figure 3-66, the Unique Three River Bottom is apattern somewhat like a Morning Star. The trend is down and a long blackreal body is formed. The next day opens higher, trades at a new low, thencloses near the high, producing a small black body. The third day openslower, but not lower than the low that was made on the second day. Asmall white body is formed on the third day, which closes below the closeof the second day. The Unique Three River Bottom is extremely rare.
Rules of Recognition1. The first day is a long black day.v
2. The second day is a Harami day, but the body is also black.3. The second day has a lower shadow that sets a new low.4. The third day is a short white day which is below the middle day.
Reversal Candle Patterns
Chapter 3
Scenarios and Psychology Behind the Pattern
Related Patterns
A falling market produces a long black day. The next day opens higher,but the bearish strength causes a new low to be set. A substantial rallyensues in which the strength of the bears is in question. This indecisionand lack of stability is enforced when the third day opens lower. Stabilityarrives with a small white body on the third day. If, on the fourth day,price rises to new highs, a reversal of trend has been confirmed.
This pattern is a take-off of the Morning Star, but doesn't look anythinglike it. Its appearance in Japanese literature is part of the Sakata Method(see Chapter 5).
ExampleFigure 3-68
Pattern Flexibility911013 (1901
Because this is such an unusual and precise pattern, there is not muchflexibility. If the lower shadow on the second day were quite long, thegreater potential for reversal would be more likely. In some literature, thesecond day resembles a Hammer line. Like many reversal patterns, ifvolume supports the reversal, the success is likely to be greater.
The Unique Three River Bottom pattern reduces to a single line that mostlikely is a Hammer line (Figure 3-67). The lower shadow must be at leasttwice as long as the body to be a Hammer, which, in this case, is quitepossible because of the long lower shadow on the second day. The Hammer fully supports the bullishness of the Unique Three River Bottom pattern.
Chapter 3
Reversal Candle Patterns
Scenarios and Psychology Behind the PatternThe Three White Soldiers pattern occurs in a downtrend and is representative of a strong reversal in the market. Each day opens lower but thencloses to a new short term high. This type of price action is very bullishand should never be ignored.
Pattern FlexibilityThe opening prices of the second and third days can be anywhere withinthe previous body. However, it is better to see the open above the midpointof the previous day's body. Keep in mind that when a day opens fortrading, some selling has to exist to open below the previous close. Thissuggests that a healthy rise is always accompanied by some selling.
CommentaryThe Three White Soldiers pattern is a vital part of the Sakata Methoddescribed in Chapter 5. It shows a series of long white candlesticks whichprogressively close at higher prices. It is also best if prices open in themiddle of the previous day's range (body). This stair-step action is quitebullish and shows the downtrend has abruptly ended.
Rules of Recognition1. Three consecutive long white lines occur, each with a higher close.2. Each should open within the previous body.3. Each should close at or near the high for the day.
The Three White Soldiers pattern reduces to a very bullish long whitecandle line (Figure 3-70). This breakdown is in full support of the pattern,which makes confirmation unnecessary.
Chapter 3
Reversal candle Patterns
Related PatternsSee the next two patterns, Advance Block and Deliberation.
ExamplesFigure 3-71
CommentaryAs shown in Figure 3-72, this pattern is a derivation of the Three WhiteSoldiers pattern. However, it must occur in an uptrend, whereas the ThreeWhite Soldiers must occur in a downtrend. Unlike the Three White Soldiers pattern, the second and third days of the Advance Block pattern showweakness. The long upper shadows show that the price extremes reachedduring the day cannot hold. This type of action after an uptrend and thenfor two days in a row should make any bullish market participants nervous, especially if the uptrend was getting overextended.Remember, that this pattern occurs in an uptrend. Most multiple-daypatterns begin with a long day, which helps support the existing trend. Thetwo days with long upper shadows show that there is profit taking becausethe rise is losing its power.
Reversal candle Patterns
Chapter 3
Rules of Recognition1. Three white days occur with consecutively higher closes.
2. Each day opens within the previous day's body.3. A definite deterioration in the upward strength is evidenced by longupper shadows on the second and third days.
Scenarios and Psychology Behind the PatternThe scenario of the Advance Block pattern closely resembles the eventsthat could take place with the Three White Soldiers pattern. This situation,however, does not materialize into a strong advance. Rather, it weakensafter the first day because the close is significantly lower than the high.The third day is as weak as the second day. Remember, weakness in thiscontext is relative to the Three White Soldiers pattern.
Pattern FlexibilityDefining deterioration is difficult. Although this pattern starts out like theThree White Soldiers, it doesn't produce the upward strength and each dayshows smaller body length and longer shadows. The second and third dayneed to trade higher than their closes.
Pattern BreakdownFigure 3-73
The Advance Block pattern reduces to a long white candle line that is notquite as long as the Three White Soldiers breakdown (Figure 3-73). Thislong white candlestick also has a long upper shadow, which shows that theprices did not close nearly as high as they got during the trading days.Because of this, the Advance Block is viewed as a bearish pattern. In mostcases, this could only mean that long positions should be protected.
Related PatternsThis is a variation of the Three White Soldiers (discussed previously) andthe Deliberation pattern (explored next).
ExamplesFigure 3-74
Chapter 3
Deliberation(oka sansei shian boshi)Bearish reversal pattern.Confirmation is suggested.
Figure 3-75
Reversal candle Patterns3. The third day is a Spinning Top and most probably a star.
Scenarios and Psychology Behind the PatternThis pattern exhibits a weakness similar to the Advance Block pattern inthat it gets weak in a short period of time. The difference is that theweakness occurs all at once on the third day. The Deliberation patternoccurs after a sustained upward move and shows that trends cannot last
forever. As with the Advance Block, defining the deterioration of the trendcan be difficult.
Pattern FlexibilityIf the third white body is also a star, watch for the next day to generate a
possible Evening Star pattern.
Pattern Breakdown
Commentary
Figure 3-76
As illustrated in Figure 3-75, the Deliberation pattern is also a derivativeof the Three White Soldiers pattern. The first two long white candlesticksmake a new high and are followed by a small white candlestick or a star.This pattern is also called a Stalled pattern in some literature. It is best ifthe last day gaps above the second day. Being a small body, this shows theindecision necessary to arrest the upmove. This indecision is the time ofdeliberation. A further confirmation could easily turn this pattern into anEvening Star pattern.
Rules of Recognition1. The first and second day have long white bodies.
2. The third day opens near the second day's close.
The Deliberation pattern reduces to a long white candlestick (Figure 3-76).This is in direct conflict with the pattern itself which suggest the need forfurther confirmation. A gap down on the following day would produce anEvening Star and therefore support this pattern's bearishness.
Chapter 3
Reversal Candle Patterns
Related Patterns
. Three Black Crows
See the previous two patterns, the Three White Soldiers and Advance 1 smba/ i. mram\Block.I \8arasu)
ExampleFigure 3-77
•1O3O3
[2IB1
CommentaryThe Three Black Crows is the counterpart of the Three White Soldierspattern. Occurring during an uptrend, three long black days are stairstepping downward. "Bad news has wings," an old Japanese expression, easilyfits this pattern. Each day opens slightly higher than the previous day'sclose, but then drops to a new closing low. When this occurs three times,a clear message of trend reversal has been sent. Be careful that this downward progression does not get overextended, that would surely cause somebottom picking from the eternal bulls.
Rules of Recognition1. Three consecutive long black days occur.^ 2. Each day closes at a new low.3. Each day opens within the body of the previous day.4. Each day closes at or near its lows.
Chapter 3
Reversal Candle Patterns
Scenarios and Psychology Behind the Pattern
Related Patterns
The market is either approaching a top or has been at a high level for sometime. A decisive trend move to the downside is made with a long blackday. The next two days are accompanied by further erosion in pricescaused by much selling and profit taking. This type of price action has totake its toll on the bullish mentality.
A more rigid version of this pattern is the Identical Three Crows (see thefollowing pattern).
Pattern FlexibilityIt would be good to see the real body of the first candlestick of the ThreeBlack Crows under the prior white day's high. This would accelerate thebearishness of this pattern.
The Three Black Crows pattern reduces to a long black candlestick, whichfully supports this pattern's bearishness (Figure 3-79).
Chapter 3
Reversal Candle Patterns
Identical Three Crows
Scenarios and Psychology Behind the Pattern
(doji sanba garasu)Bearish reversal pattern.No confirmation is required.
This pattern resembles a panic selling that should cause additional downside action. Each day's close sets a benchmark for opening prices the nexttrading day. There is a total absence of buying power in this pattern.
pattern FlexibilityBecause this pattern is a special version of the Three Black Crows pattern,flexibility is almost nonexistent.
Pattern BreakdownFigure 3-82
CommentaryThis is a special case of the Three Black Crows pattern discussed earlier.The difference is that the second and third black days open at or near theprevious day's close (Figure 3-81).
Rules of Recognition1. Three long black days are stair-stepping downward.
Like the Three Black Crows pattern, the Identical Three Crows reduces toa long black candlestick (Figure 3-82). This fully supports the pattern'sbearish implications.
2. Each day starts at the previous day's close.
Related PatternsThis is a variation of the Three Black Crows pattern.
Chapter 3
ExampleFigure 3-83
Reversal candle Patterns
Breakaway(hanare sante no shinte zukae)Confirmation is recommended, especially for the bearish Breakaway pattern.
Figure 3-84
Figure 3-85
D
CommentaryBullish BreakawayThe bullish Breakaway pattern comes during a downtrend and representsan acceleration of selling to a possible oversold position. The pattern startsa long black day followed by another black day whose body gapsdown (Figure 3-84). After the down gap, the next three days set consecutively lower prices. All days in this pattern are black, with the exception of•the third day, which may be either black or white. The three days after the.gap are similar to the Three Black Crows in that their highs and lows areeach consecutively lower. The last day completely erases the small blackdays and closes inside the gap between the first and second days.
The bearish Breakaway pattern involves a gap in the direction of the trendfollowed by three consecutively higher price days (Figure 3-85). In an
Chapter 3
uptrend, a long white day is formed. Then the next day, prices gap upwardto form another white day. This is followed by two more days which sethigher prices. The color of the days should be white with only one exception: the third day of the pattern, or the second day after the gap, may beeither black or white as long as a new high price has been made. The lowprices set in the three days after the gap should also be higher than eachprevious day's low price. The idea of this pattern is that prices haveaccelerated in the direction of trend and an overbought situation is developing. The last day sets up the trend reversal by closing inside the gap ofthe first and second days.Japanese literature does not discuss a bearish version of the Breakawaypattern. I decided to test such a pattern and have found that it works quitewell. See Chapter 6 for results.
Reversal candle Patterns
pattern FlexibilityBecause this is a complex pattern, it is difficult to discuss flexibility. Aslong as the basic premise is maintained, this pattern can offer some flexibility. There could be more than three days after the gap as long as the lastday of the pattern closes inside the initial gap. It is also possible to have atleast two days after the gap.
Rules of Recognition1. The first day is a long day with color representing the current trend.
2. The second day is the same color and the body gaps in the directionof the trend.3. The third and fourth days continue the trend direction, with closesconsecutively greater in the direction of trend.4. The fifth day is a long opposite-color day that closes inside the gapcaused by the first and second days.
Scenarios and Psychology Behind the PatternIt is important to realize what is being accomplished here: the trend hasaccelerated with a big gap and then starts to fizzle, but it still moves in thesame direction. The slow deterioration of the trend is quite evident fromthis pattern. Finally, a burst in the opposite direction completely recoversthe previous three days' price action. What causes the reversal implicationis that the gap has not been filled. A short-term reversal has taken place.
The bullish Breakaway pattern reduces into a possible Hammer line (Figure 3-86). The lower shadow