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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