A long black candlestick at the top of a rally is a strong indication that the buyers are running out of steam and the bears are entering the market aggressively. Now that we have defined it, we need to pause for a while and explain the term long.

Well, long refers to the real body being longer than the average body-length of the recent candlestick bodies. Some traders consider a long real body to be about 3 times longer than the size of the previous body. I take a slightly different approach. Consider the average length of the last 25 real bodies, then double the size. Perhaps you can come up with a different method. Why not?

So, what are the specifications of the long black body?

  1.  The real body is longer than the average size of the recent candlestick bodies
  2. It has a tiny or no upper shadow at all.
  3. It has a tiny or no lower shadow.
  4. The close price is much lower than the open price.

Now, let’s talk take a look at potential sell setups. Say that you identify a long black real body at a resistance area. How do you feel about it? What do you think is going to happen next? If you say downward movement then I agree with you. So, a sell right below the low of the candle and a stop loss just above the high price. Also, a long black body breaking below an uptrend line would signal a reversal, right? The same goes for a breakout below a support line.

At times after the formation of a long black body, a correction is not uncommon as the price becomes oversold too fast. Well, this may provide a different sell setup at a higher price and more specifically near the midpoint of the body. Needless to mention that the stop loss remains at the high price.