Understanding Bearish Three-Stick Trend Reversal Patterns

Much like their bullish counterparts from Chapter 9, a host of three-day bullish patterns commonly indicate that a trend reversal is forthcoming. The patterns in this section tell you when an uptrend is nearing its end and when a downtrend is ready to begin. The bearish reversal patterns can be very useful for shorts, but keep in mind that shorting — especially with stocks — when the trend is up can be a difficult undertaking.

The three inside down pattern

The three inside down pattern is a handy reversal pattern that shows up fairly regularly. The indecision implied by the pattern’s second day (an inside day) provides great insight into the action, telling you that the bears are starting to push against the trend.

Figuring out how to spot the three inside down pattern

The three inside down always occurs in an established uptrend:

1. The first day of the pattern is an up day.

The bulls are in control on the first day of the three inside down.

2. The second day is bearish, and it’s also an inside day relative to the first day.

(The open is lower than the previous day’s close, and the close is higher than the previous day’s close.) The high and low of the second day also fall within the high/low range established on the first day of the pattern. The bears take over on the second and third days (see next bullet point).

3. The pattern is completed on the third day with another down day that actually violates the low ...

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