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Abandoned Baby
Advance Block
Belt Hold
Breakaway
Dark Cloud Cover
Deliberation
Doji Star
Dragonfly Doji
Downside Gap Three Methods
Downside Tasuki Gap
Engulfing
Evening Doji Star
Evening Star
Falling Three Methods
Gravestone Doji
Hanging Man
Harami
Harami Cross
Identical Three Crows
In Neck
Kicking
Meeting Lines
On Neck
Separating Lines
Shooting Star
Side By Side White Lines
Three Black Crows
Three Inside Down
Three Line Strike
Three Outside Down
Thrusting
Tri Star
Two Crows
Upside Gap Two Crows

Three Outside Down
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Pattern: reversal
Reliability: high

Identification
A bearish Engulfing pattern is followed by a black day whose close is lower than the second day.

The Psychology
In an uptrend or within a bounce of a downtrend, a bearish Engulfing pattern forms. By itself this pattern has moderate reliability as a reversal indicator, but when the it is followed by another black day (preferably on strong volume), the overall pattern becomes much more reliable.

The bearish Three Outside Down is a continuation of the bearish Engulfing.



The bearish Three Outside Down pattern is one of the most reliable candle formations, and when it occurs at resistance, the risk/reward on the short side is heavily in your favor. In this ATH example, support on the way down became resistance on the way up, and after several weak attempts (see the low volume) to break up, the Three Outside Down pattern started the next leg down.



Here is another reliable scenario. Although NTAP was in a decent uptrend, the stock formed a bearish Three Outside Down pattern and broke support at the same time. That's a nice one-two punch.


SINA is an example of the riskiest way to play this formation. The stock was generally in a good uptrend with no noticeable resistance nearby. The Three Outside Down pattern did mark the end of the rally, but given the lack of overhead resistance, it was a riskier play.


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