The Dark Cloud Cover consists of two Japanese candlesticks. It forms at the top of a rally or near a resistance area. The first candle is a long white body confirming the direction of the prevailing and the bulls’ intention to pull prices higher. Of course, in the markets, nothing is 100% and this was true during the formation of the Dark Cloud.

After the first candle is formed, one would expect the continuation of the upward direction, especially considering that the opening of the second candle is higher than the previous high. But unfortunately for the buyers, an important event or the release of significant information shifts the balance between buyers and sellers in favor of the sellers, and as a result, a long black body forms and closes s below the mid-point of the first candle. This signals, as might have guessed the weakness of the bulls to maintain the rally and the overwhelming strength of the bears to push the prices lower. Now, it’s a good time to list the specifications of the Dark Cloud:

  1. The first candle is a long white real body in the direction of the rally
  2. The second candle opens above the high price of the previous candle
  3. The second candle is a long black real body
  4. The second candle closes below the middle of the first candle

Excellent! What about any potential sell setups? Well, a potential sell order may be placed just below the low of the long white body. Some traders would place it after the low of the long black candle, but I find it a bit too fast and too aggressive. As I always say, never forget to place a protective stop loss at the high price of the long white candle. I hope you learned something new.

See you in a while!