Dark Cloud Cover

The dark-cloud cover reversal pattern is a bearish reversal pattern and is to be found in up trending markets, usually signaling a top. This is a dual pattern, in the sense that it is formed out of two different candles, and in a way resembles to the engulfing pattern, with the difference that under the dark-cloud cover pattern the second candle, the red one, does not engulf the whole body of the previous candle, but something like 50% of it. Anyways, consider that the greater the degree of engulfing, the stronger the pattern and the signal, as engulfing is stronger than dark-cloud cover.

Just as a bearish engulfing pattern can be resistance, so too the highest high of the two candles that form the dark-cloud cover should be resistance. Why? Well, think of the pattern as stopping a rally, so normally the highs of this rally should offer quite a resistance on any attempt to overcome them. Again, the higher the time frame, the stronger the pattern. You will see that on the one hour chart or five minutes chart such patterns are often overcome in currency markets, but starting with the daily charts they can become a powerful tool when looking for reversal patterns.

Using the concept of the dark-cloud cover as a potential resistance, one could wait for a bounce to near the dark-cloud cover in order to initiate a selling position, but this is tricky, because such a bounce may never come, as it is not mandatory.

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