The dark cloud cover is a signal that tells an obvious reversal of a trend and is the bearish counterpart to the piercing pattern. It is one of the 12 major candlestick patterns and it is named the dark cloud cover because it looks like a dark cloud over a nice bright sunny uptrend.
The first day of this pattern is a long white or green candle at the top end of a trend with the second day’s open higher than the high of the previous day. It closes at least half way down the previous day’s candle and the further down the white or green candle it closes the more convincing the reversal is. Keep in mind that a close at or below the previous day’s open turns this pattern into a bearish engulfing signal.
Criteria for the dark cloud cover
- The body of the first candle is white or green and the body of the second candle is black or red.
- A long white candle occurs at the top of the trend. The up-trend has been evident for a good period.
- The second day opens higher than the trading of the prior day.
- The black or red candle closes more than half-way down the white or green candle.
Signal Enhancements for the dark cloud cover
- The longer the candle the more forceful the reversal.
- The higher the gap up is from the previous days close the more pronounced the reversal.
- The lower the black or red candle closes into the white or green candle the stronger the reversal.
- Large volume during these two trading days is a significant confirmation.
Pattern Psychology
After a strong up-trend has been in effect the atmosphere is bullish. Exuberance sets in as the price gaps up. The bears begin to appear and push the price back down and it finally closes at or near the lows for the day. The close has negated most of the previous day’s gains and the bulls are now concerned because they see that the uptrend may have stopped. This signal makes for a good short with a stop being the high of the black or red candle day. Notice that if the dark cloud candlestick closes lower and below the open of the previous day it will become a bearish engulfing pattern which has slightly stronger bearish implications.
Using candlesticks signals with other technical analysis tools greatly enhances the ability to recognize what the candlestick charts are revealing. Use of these patterns will benefit you for the rest of your investment career.
