Bearish Multi-Candlestick Patterns

CA Manish Singh: 
Hello everyone, and welcome to Chapter 6. In the previous chapter, we covered the key bullish reversal patterns that form using a combination of candlesticks. 
Today, we will learn the bearish versions of those patterns. These indicate that a rising market may be losing strength and could reverse downward. 

Just like in bullish patterns, the names are often the same, but the interpretation and trade decisions are completely different. 

With practice, as you review dozens of charts a day, these patterns become easy to recognise. Let us look at each one in detail. 

What This Chapter Covers: The Building Blocks of Bearish Reversals 

CA Manish Singh: 
A pattern becomes bearish only when it forms after an uptrend. The preceding trend is the key difference between bullish and bearish versions. 

When a market rises with multiple green candles and then shows a specific combination of candles that signal exhaustion, it may prepare for a reversal. 

We will now study four important bearish reversal patterns. 

1. Bearish Engulfing Pattern 

CA Manish Singh: 
The Bearish Engulfing Pattern appears after a sustained uptrend. 

Structure: 

• Several green candles forming higher levels
• A small green candle at the top
• Followed by a large red candle that completely engulfs the previous green candle 

Key characteristics: 

• The red candle is often almost double the size of the prior green candle
• It opens above the previous close and finishes well below it
• The candle is usually Marubozu-like, with a strong body and minimal wick 

Why this signals reversal: 

• Traders holding long (bullish) positions place stop-losses candle by candle
• The large red candle triggers many of these stop-losses
• Forced exits create additional selling pressure
• Sellers gain control and the trend may shift from bullish to bearish 

Trade Setup: 

• Stop-loss: above the high of the engulfing red candle
• Entry: below the low of the engulfing candle
• Trail the stop-loss as the market moves downward 

This is the Bearish Engulfing Pattern. 

2. Bearish Harami Pattern 

CA Manish Singh: 
The next pattern is the Bearish Harami. 

Structure: 

• A large green candle, often Marubozu in nature
• Followed by a small red candle that forms inside the body of the green candle
• The red candle is typically half the size (or smaller) than the green candle 

Interpretation: 

• Traders who bought during the large green candle see a small red candle appear at the top
• Many of their stop-losses get triggered when price weakens
• This hints at exhaustion in the uptrend 

Confirmation: 

• A Bearish Harami is confirmed when the next candle also closes red
• The full setup usually has three candles:

1. Large green
2. Small red (inside the prior body)
3. Another red candle confirming downward momentum 

This pattern signals the potential start of a downward move. 

3. Dark Cloud Cover Pattern 

CA Manish Singh: 
Let us now discuss the Dark Cloud Cover Pattern. 

Structure: 

• First candle: a large green candle indicating strong buying
• Second candle: a red candle that opens above the high of the green candle
• The red candle then closes below the midpoint of the green candle 

Example: 
If the large green candle has: 

• High: ₹100
• Low: ₹80
• Midpoint: ₹90 

For a valid Dark Cloud Cover: 

• The red candle must close below ₹90 

Why this works: 

• Traders rarely place stop-losses at the top of a large candle
• Most stop-losses for long positions cluster around the midpoint
• When the red candle closes below 50 percent of the previous candle, these stop-losses get triggered
• Exit pressure increases selling, causing the market to reverse 

Confirmation: 

• A stronger confirmation appears if the next candle opens below the red candle
• This indicates sellers are firmly in control 

Stop-loss for trading: 

• Above the high of the Dark Cloud Cover red candle 

This pattern signals a potential bearish reversal. 

4. Evening Star Pattern 

CA Manish Singh: 
The Evening Star Pattern is a powerful three-candle bearish reversal pattern. 

Structure: 

1. A large green candle showing strong buying
2. A small candle (often Doji-like), indicating hesitation at higher levels
3. A large red candle that closes well into the body of the first green candle 

This three-candle formation resembles an inverted V. 

Interpretation: 

• The first green candle shows strong bullish momentum
• The small candle shows buyers losing strength
• The final red candle confirms that sellers have taken control 

Trade Setup: 

• Stop-loss: above the high of the large red candle
• Traders consider entering short positions once price moves below the red candle’s low 

This is the Evening Star Pattern. 

Where Do These Patterns Appear? 

CA Manish Singh: 
Bearish patterns do not appear randomly. They most commonly form near resistance zones, where price struggles to move higher. 

Just as bullish patterns form near support, bearish patterns emerge near resistance. 

In the next chapter, we will learn how to mark support and resistance levels on charts and how to use them to make trading decisions. 

Summary and Takeaways 

• Bearish patterns indicate weakening buying interest and potential trend reversal
• Key bearish patterns covered:
• Bearish Engulfing
• Bearish Harami
• Dark Cloud Cover
• Evening Star
• Confirmation increases the probability of a successful trade
• Stop-losses are placed above the pattern’s high
• Bearish patterns usually form at resistance
• Practice helps identify these patterns quickly 

Please revise this chapter before moving ahead. 

Disclaimer: 
Investments in securities markets are subject to market risks. Read all related documents carefully before investing.