A Dark Cloud Cover is a bearish two-candlestick pattern that implies the end of a bull phase and the beginning of a new phase of selling. It is best seen at the end of an uptrend in the price.
Candle 1 is a decisive bullish candle. The price moves strong higher between the OPEN and the CLOSE. It has small (or no) upper and lower shadows. Candle 2 is then a strong negative candle. The price gaps higher at the OPEN of Candle 2 but this is an exhaustion move that is followed by a correction. Candle 2 has a decisive negative body. Crucially, the CLOSE price of Candle 2 is below the mid-point (below 50% of the daily range) of Candle 1.
Due to the requirement of a gap higher at the OPEN of Candle 2, the Dark Cloud Cover is a candlestick set-up most associated with equity markets (i.e. markets that do not trade 24 hours per day). The opposite of the Dark Cloud Cover candle is the Piercing Line. This is a bullish candlestick set-up at the bottom of a downtrend in the price. It signals the beginning of a new positive trading phase.
| DARK CLOUD COVER | |
| Price action | A two-candlestick set-up that signals the end of an uptrend. Candle 1: A decisively strong bullish candle. The OPEN is towards the LOW of the candle, with the CLOSE towards the HIGH.Candle 2: The price gaps higher at the OPEN with the price hitting a new high. The move then falters and the price trades strongly lower. The CLOSE is near the LOW of Candle 2 and is below the mid-point of the range (50%) on Candle 1. |
| KEY REQUIREMENTS | An uptrend precedes the pattern. A gap higher at the OPEN on Candle 2Candle 2 has a CLOSE below 50% of the daily range of Candle 1. |
| Psychology | The price has gapped higher in Candle 2, but this is an exhaustion move. The buying pressure disappears and the uptrend begins to falter.The exhaustion encourages sellers to take control, with a correction in the price then developing. |
| Confirmation | Only after the CLOSE of Candle 2 is below the mid-point of Candle 1. Trading positions can then be taken during the next candle. |
| High Conviction | Extremely small or no shadows on both candles.The CLOSE of Candle 2 is significantly below the mid-point line of Candle 1 (perhaps even near the OPEN of Candle 1). |
| Lower Conviction | The preceding price action is only a gentle (or tentative) uptrend.Long shadows on both candles – indicate a more uncertain market.The HIGH of Candle 1 is above the HIGH of Candle 2. |
| Potential Stop-Loss | The Dark Cloud Cover marks the key high of the uptrend. Stop-losses for sell orders should therefore be placed above the HIGH of Candle 2. |
