The upside gap two crows pattern is a notable formation in the realm of technical analysis. As a three-day candlestick chart pattern, it serves as a crucial signal for traders, indicating that an upward price trend may be losing momentum and could soon be reversed. While the formation is relatively rare, it is essential for traders looking to navigate the complexities of market trends.
Key Takeaways
- The upside gap two crows is identified with a three-candle sequence that indicates a potential reversal in an uptrend.
- The pattern requires specific candles to be arranged in a particular order to be recognized, and it is most effective when formed in a strong uptrend.
- Although this pattern often suggests a potential price decline, the outcome is not guaranteed; prices may also consolidate or continue to rise.
What is the Upside Gap Two Crows?
Structure of the Pattern
The upside gap two crows forms during a prevailing uptrend and is characterized by the following sequence of candles:
-
Candle 1: The first candle is a long bullish (white or green) candlestick which confirms the uptrend by closing significantly above where it opened.
-
Candle 2: The second candle, despite gapping higher at the open, is a bearish (black or red) candle that closes below its open. The gap signifies strong upward pressure at the beginning, yet the closing price reflects bearish sentiment.
-
Candle 3: The third candle is another bearish candle that not only opens above Candle 2's open but also closes beneath Candle 2’s close while closing higher than Candle 1’s close. This candle effectively engulfs Candle 2, reinforcing the emerging weakening sentiment among buyers.
Interpretation
The upside gap two crows indicates a shift in momentum as bulls seemingly exhaust their strength in pushing prices up. Despite initial selling pressure, the inability of the bulls to sustain the momentum reflects a transition in market sentiment from bullish to bearish. Traders see this phenomenon as a possible signal for profit taking or entering short positions.
Trading the Upside Gap Two Crows
When traders identify an upside gap two crows pattern, they often wait for "confirmation" before executing trades. This involves monitoring subsequent price movements and looking for a drop below the low of the third candle (Candle 3). There are two primary patterns of operation:
-
Immediate Action: Traders may choose to short immediately after Candle 3 closes or exit existing long positions. If opting for this approach, it's prudent to set a stop-loss order above the high of Candle 3 to contain risks.
-
Confirmation Strategy: Some traders prefer a wait-and-see approach, continuing to hold long positions until the price actually drops below Candle 3’s low before deciding to exit or go short.
Real-World Example
The relevance of this pattern is illustrated in the daily chart of companies like Apple Inc. (AAPL) during a significant price rally over a few weeks. After observing the combination of candles that meet the criteria for an upside gap two crows, traders may interpret the resulting price action as a signal to exit their long positions or to initiate short sales.
Distinction from Other Patterns
The upside gap two crows pattern should not be confused with similar bearish signals like the three black crows pattern. While both suggest a potential reversal to the downside, the three black crows are characterized by three consecutive long bearish candles that unfold after an uptrend – indicating a more aggressive sell-off.
Limitations of the Pattern
Despite its implications, the upside gap two crows pattern carries limitations:
-
Lack of Price Targets: Although the formation indicates a potential reversal, it does not predict the extent of the subsequent price decline. Traders should apply additional analysis techniques to ascertain risk-reward ratios.
-
Possible Outcomes: The mere appearance of this pattern does not guarantee that prices will drop; rather, they may trend sideways or continue an uptrend, highlighting the importance of contextual analysis when executing trades.
Conclusion
The upside gap two crows is a powerful tool for traders aiming to refine their market strategies. While it signals potential bearish reversals, understanding the context and seeking confirmation can enhance decision-making. As with all trading strategies, caution and comprehensive market analysis are crucial to mitigate risks and optimize opportunities in trading scenarios.