I wanted to introduce to you the notion of separating lines because I considered them to be one of the most important continuation pattern. They have a drawback though, and that is, they are extremely rare.
Separating lines are to be met on market rallies, normally being part of a 3rd wave type advance, and imply a small gap from the previous candle’s closing until the opening of the next one.
They can be both bullish and bearish continuation patterns. During a market rise, a red real body appears, giving the impression bears might take control of the situation, but only until the opening of the next candle, which should come with a gap big enough that the candle should open at the previous red candle’s opening price or higher. The opposite is true for the bearish separating lines pattern.
These continuation pattern appear rarely on the currency markets (actually I tried to find an example on the eurusd currency pair and I couldn’t) but they are quite common for the stock market and equity indices.
For the purpose of this chapter the recording will show you how this pattern looks like, and the importance of if because almost always suggests a 3rd wave type advance/decline, with markets gaping for the move higher/lower. Again, the higher the time frame, the more important the pattern.