Monday, October 31, 2011

Piercing Line

The Piercing Line is the opposite of the Dark Cloud pattern and is a reversal signal if it appears after a down-trend.
Piercing Pattern
The Piercing Pattern is a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern.
There are two components of a Piercing Pattern formation:
  • Bearish Candle (Day 1)
  • Bullish Candle (Day 2)
A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of Day 1's bearish candle.
Moreover, a price gap down on Day 2 only for the gap to be filled and closes significantly into the losses made previously in Day 1's bearish candlestick.
The rejection of the gap up by the bulls is a major bullish sign, and the fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment. Bulls were successful in holding prices higher, absorbing excess supply and increasing the level of demand.
The chart below of Intel (INTC) stock illustrates an example of the Piercing Pattern:
Buy Signal
Generally other technical indicators are used to confirm a buy signal given by the Piercing Pattern (i.e. downward trend line break). Since the Piercing Pattern means that bulls were unable to completely reverse the losses of Day 1, more bullish movement should be expected before an outright buy signal is given. Also, more volume than usual on the bullish advance on Day 2 is a stronger indicator that bulls has taken charge and that the prior downtrend is likely ending.
A more bullish reversal pattern is the Bullish Engulfing Pattern that completely reverses the losses of Day 1 and adds new gains.
For further study, the bearish equivalent of the Piercing Pattern is the Dark Cloud Cover Pattern.