What Is an Upside Gap Two Crows?
The upside gap two crows pattern is a three-day candlestick chart formation signaling a potential termination of an upward price move, hinting at a possible reversal to a lower trend. Though this specific pattern is rare, its visual and particular structure can be a powerful tool for traders.
Key Takeaways
- The pattern suggests a slowdown in an uptrend’s momentum, hinting at a potential bearish reversal.
- The formation starts with a large bullish candle, followed by a gap to a bearish candle, ending with an engulfing bearish candle.
- This isn’t an absolute reversal indicator; prices may also stabilize or rally afterward.
- Waiting for confirmation, such as a drop below the third candle’s low, can clarify whether to act on this signaling.
The Market Psychology Behind Upside Gap Two Crows
This pattern acts as a bearish reversal signal and requires:
- Candle 1: A bullish long candlestick indicating an uptrend continuation, with a closing price significantly above the open.
- Candle 2: Despite gapping higher, this is a bearish candle that closes below its open.
- Candle 3: Another bearish candlestick that opens above the second candle’s open and closes below the second but above the first candle’s close. This candle engulfs the second.
How to Interpret Upside Gap Two Crows
For validity, the pattern must occur during a discernible uptrend. The first candle’s large bullish body (white or green) must be trailed by a bearish candle (black or red) with a gap and smaller real body. Finally, the third candle is another engulfing bearish candle, but significantly, its close remains above the first candle’s close.
This indicative pattern suggests the security could be transitioning from bullish to bearish sentiment. It nuances that despite strong bullish opening attempts, the market hasn’t sustained this energy, indicating potential bearish inclinations. Context and confirmation, like price movements below the third candle’s low, add reliability.
Example and Application
Consider the daily chart of a high-profile stock like Apple Inc. Here, over a few weeks, you’ll notice an upside gap two crows pattern. The sequence features a strong green uptrend candle followed by upward gapping during bearish declines, climaxing with an engulfing third bearish candle.
Traders might use this pattern to exit long positions or enter shorts near the third candle’s close. Alternatively, awaiting confirmation means exiting or shorting on price drops below the third candle’s low, prepared with stop loss orders above this high if navigating short positions.
Key Differences: Upside Gap Two Crows vs. Three Black Crows
While both indicate possible reversals, the three black crows pattern forms with three consecutive long bearish candles after an uptrend, focusing on continual bearish sentiment establishment.
Recognize Limitations
The upside gap two crows pattern doesn’t forecast the extent of potential declines. Supplementary analysis methods are essential for determining short position exits or fall potential. It doesn’t guarantee reversal; prices may flatline or climb post-pattern.
Related Terms: bullish candle, bearish candle, gap, closing price, engulfing
