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Confirmation Patterns

The When, Where & Why of Confirmation Patterns

Confirmation patterns are an important tool for investors to use when they are thinking of entering a market position or when they are in a market position and want to maximize their profits. Confirmation pattern can be used to attempt to identify which patterns will have a greater ability to follow through with the potential market trend. Confirmation patterns typically have a much greater ability to trend than aggressive patterns without confirmation.

The chart above is highlighted with some confirmed patterns that have formed. Some formed at opportune times, other at inopportune times. Confirmation patterns are not 100% accurate all of the time (much like any other investment techniques). Although I believe confirmation patterns are roughly 70 to 80% accurate most of the time at identifying market trend reversals.

A. This pattern is a Dark Cloud Cover Confirmation that indicates a potential bearish price reversal and will generate a sell signal. Remember Lesson 3 and the fact that the market breathes throughout a trend. This is exactly what is happening here. Even though the Dark Cloud Cover Confirmation pattern has formed, the market does not continue downward. In fact, the confirmation pattern is followed by an Engulfing Bullish pattern. This is a sure sign that the market will probably not continue lower and may eventually attempt to rally again.

B. Shortly after A, after the market traded within a congestion band for a while, an Engulfing Bullish Confirmation pattern formed just as the market began another rally. This particular confirmation signal is rather strong because the confirmation candle gapped above the Engulfing Bullish pattern. This is a good signal that the market has re-entered a bullish trend and should continue to rally.

C. Only a few trading days later, an Engulfing Bearish pattern formed and confirmed. This, again, is a solid confirmation signal of a bearish reversal signal that issues a sell signal, yet the market price did not continue much lower. In fact, a Doji (in a star formation) followed the confirmation signal, then a white candle followed the Doji. This pattern formation, as we know, is a Three River Morning Star pattern that indicates a potential market bottom reversal signal and identifies a new support level. As long as the market stays above the support level, we should expect the market price to move higher.

D. At this point, another Doji formed to create a Bearish Harami Cross which indicated a potential bearish market reversal. This pattern confirmed the following session with a large black candle. Remember, Harami Lines are not action signals they simply warn that the market may reverse. Investors should always wait for a confirmation of the Harami Line pattern before acting unless they are taking a VERY aggressive position in the market. After D, notice how the market oscillated between white and black candles. This type of candlestick activity is indicative of a congesting market. Notice also that the market price fell and tested the support level indicated by the previous Doji line. When the support level held, investors should have realized that the market may continue to rally above the support level.

E. After the market congestion, a White Inside Out Up pattern forms and confirms to indicate the market is beginning to rally. As well, notice that the confirming candle is gapping above the White Inside Out Up pattern and has closed above the resistance level. This is a good sign that the market will continue to rally.

F. After an extended bullish rally that started at E, the market reaches this point where an Incomplete Dark Cloud Cover pattern forms at the market top. The Incomplete Dark Cloud Cover pattern is very common within an up trend and investors should wait for a confirmation signal before acting on the signal. This signal confirms with a smaller black candle and issues a sell signal. Following this sell signal are two Dojis or a Doji Cluster. The bodies of the two Dojis can possibly turn into a resistance level in the future. Therefore, investors should pay special attention to these types of Doji patterns.

G. After the sell signals at F, the market price fell back to the support level from D and formed a Piercing Line pattern that issues a buy signal and warns that the market may reverse to the upside. Notice that after this Piercing Line, the market rallied back to the resistance level created at F.


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