What Is the Dark Cloud Cover?

What Is the Dark Cloud Cover?

Let me explain the Dark Cloud Cover directly: it's a bearish reversal candlestick pattern where a down candle, usually black or red, opens above the close of the previous up candle, which is typically white or green, and then closes below the midpoint of that up candle.

This pattern matters because it signals a shift in momentum from upward to downward. You see it as an up candle followed by a down candle, and traders watch for the price to keep dropping on the next candle for confirmation.

Key Takeaways

You need to know that Dark Cloud Cover shows a downward momentum shift after a price rise. It consists of a bearish candle opening above and closing below the midpoint of the prior bullish candle.

Both candles should be large to indicate strong trader participation; small candles make the pattern less reliable. Look for the next candle to confirm declining prices—that's your confirmation signal.

Understanding Dark Cloud Cover

The pattern creates a 'dark cloud' with a large black candle over the previous up candle. Buyers start strong by pushing the price higher at open, but sellers dominate later, driving it sharply lower. This buying-to-selling shift suggests a possible downside reversal.

I recommend considering this pattern only after an uptrend or price rise, as it becomes more relevant then for spotting a potential drop. If prices are choppy, the pattern isn't as meaningful, and you can expect continued choppiness.

Further Characteristics and Trading Use

These white and black candlesticks have long real bodies and short or no shadows, showing decisive downward movement. Confirm with a bearish candle after the pattern; if prices don't decline, the pattern might fail.

Use the bearish candle's close to exit longs, or wait for the next day if prices keep falling. For shorts, place a stop loss above the bearish candle's high. There's no set profit target—use other methods or patterns to decide when to exit.

Combine this with other analysis, like an RSI over 70 for overbought confirmation, or a breakdown from support levels to signal a downtrend.

Example of Dark Cloud Cover

Take the VelocityShares Daily 2X VIX Short Term ETN (TVIX) chart as an example. Here, the third bullish candle is followed by a bearish one opening higher but closing below the midpoint of the last bullish candle.

This predicted a downturn, with the next session dropping nearly seven percent, providing confirmation. If you were long, you'd exit near the bearish candle's close or on confirmation day. For shorts, enter there with a stop loss above the bearish high, then trail it down as prices fall.