Dark Cloud Cover Candle Pattern Explained (real chart examples)

Dark Cloud Cover Candle Pattern Explained (real chart examples)
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The Dark Cloud Cover is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify it in the right market position with real chart examples. We also include a link to a free MT4 indicator download.

The Dark Cloud Cover Candle Pattern is a two candle pattern which signals a potential reversal in the market. The Pattern is Bearish and should be identified as a signal when occurring in an up-trending market or at the top of a range.

Dark Cloud Cover Candle Pattern Criteria:

  • The first of this two candlestick pattern is a strong green (bullish) real body.
  • The second candle opens above the prior session’s high; that is, above the top of the upper shadow (gaps higher).
  • By the end of the second candle’s session, the market closes near the low of the day and well within the prior day’s green body.
  • The greater the degree of penetration into the previous real body the more likely a top will occur.
  • The general rule is that the reversal should be more than a 50% penetration of the second candle’s real body into the previous candle’s real body.
Dark Cloud Cover Candle Pattern Example
Dark Cloud Cover Candle Pattern Example

Additional notes:

  • This signal is more significant when the candles that form it are relatively large in the real body range and have relatively short shadows.
  • If the red candlestick does not close below the halfway point of the green candlestick it may be best to wait for more bearish confirmation following the dark cloud cover. This gives more flexibility with the 50% close rule.
  • This signal is preferred as a signal to exit longs positions more than as a signal to short the market.
  • A bearish engulfing pattern would be a more bearish signal than the dark cloud cover (read more about Engulfing Candle Pattern in our article, click HERE).

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the classification table for this pattern.

Dark Cloud Cover Candle Pattern Classification Table

Number of Candles In Pattern 2
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bearish
Market Conditions: Range, Down-trend, Up-trend Up-trend, Range
Position: Top, Bottom, Range Top

What Price Action Does The Dark Cloud Cover Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

The Dark Cloud Cover forms when a market initially looks bullish via a gap higher from the previous close and then fails to rally higher, moves lower and closes significantly below the previous candles close.

This can signal that an uptrend has run out of steam and that the bulls tried and failed to push the market higher. This is why this pattern is better used when seen at the end of a prolonged uptrend.

If, on the opening of the second candle, there is very high volume, a buying blow off could have occurred. For example, heavy volume at a new opening high could mean that many new buyers have decided to jump aboard ship.
The market then sells off, leaving many trapped traders. This can quickly lead to a sell off of those trapped traders and those that have ridden the uptrend to decide to close out.

This is why this signal is often preferred as a signal to exit a long position rather than as a signal to short the market. In terms of a bearish signal it is less bearish than a full bearish engulfing candle.

Hint: It is always good practice to look for confirmation for any signal that you are looking to trade.

Dark Cloud Cover Pattern Example With Confirmation

If the second body of the Dark Cloud Cover opens above a major resistance level and then fails, it could prove that bulls were unable to take control of the market.

In the example below of the US500, the market was up-trending. The market reached the R1 pivot point level and the Dark Cloud Cover Pattern formed. The candles forming the pattern were relatively large compared to the preceding candles.

The relatively large candles and the closure of the second candle well below the 50% midpoint of the previous candle formed a strong Dark Cloud Cover formation.

In addition, the pattern coincided with a key area of resistance as it rejected the pivot point level. This confirmation can help the trader to feel more confident in the signal and the potential for a good trade or to exit their long trade from the previous rally.

Dark Cloud Cover Candle Pattern Chart Example on a Key Level
Dark Cloud Cover Candle Pattern Chart Example on a Key Level

In What Market Conditions Does The Dark Cloud Cover Pattern Become A Signal?

The Dark Cloud Cover Candle Pattern can be seen as a potential signal when it occurs in a prolonged up-trending market and is best as a signal to exit the uptrend.

It can be used in a ranging market if it occurs at the top of trading range but is a weaker signal and should be followed by further bearish confirmation.

Let’s look at a couple of real chart examples.

Dark Cloud Cover Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

As you can see in this example of the US500 the market was ranging and a Dark Cloud Cover Pattern occurred after a strong attempt to break the range.

This potentially signaled a failure of the bulls to push higher into a new range. The market retraced back into the range before a second attempt ended in a sell off.

Dark Cloud Cover Candle Pattern Example in a Ranging Market
Dark Cloud Cover Candle Pattern Example in a Ranging Market

Dark Cloud Cover Candle Pattern In A Up-Trending Market

An up-trending market is one where the price action generally moves up over time and is characterized by higher lows and higher highs.

Up-trending Market Example
Up-trending Market Example

As you can see in this US500 example below, the market was up-trending and then the Dark Cloud Cover Candle Pattern occurred at the top of the trend. The market reversed and went lower.

Dark Cloud Cover Candle Pattern Chart Example in an Up-trending Market
Dark Cloud Cover Candle Pattern Chart Example in an Up-trending Market

Dark Cloud Cover Candle Pattern MT4 Indicator Download (free)

If you trade using MT4 then why not try out our free MT4 indicator? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.

There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.

To download either or both, follow this link to the Dark Cloud Cover MT4 Indicator.

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.

Related Patterns

Piercing Pattern Candle Pattern

The Piercing Candle Pattern is seen as the opposite of the Dark Cloud Cover Pattern. It is seen as a bullish reversal pattern. To read our article about this pattern click here: Piercing Candle Pattern Explained.

More About Candlestick Patterns

If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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