The dark cloud cover is a two-candle bearish reversal pattern that appears at the top of uptrends. Like a dark cloud blocking out the sun, this pattern signals that bearish forces are overtaking bullish momentum. When you spot a dark cloud cover at resistance, it often marks the beginning of a significant decline.
What is a Dark Cloud Cover Pattern?
A dark cloud cover consists of two candlesticks: a bullish candle followed by a bearish candle that opens above the previous high but closes below the midpoint of the previous candle's body. The pattern shows sellers aggressively pushing prices down after an initial bullish gap up.
Key requirement: The second candle must close below the 50% level of the first candle's body. This penetration shows that sellers have truly taken control. If it closes above the midpoint, the pattern is not valid.
Dark Cloud Cover Requirements
For a valid dark cloud cover pattern, these conditions must be met:
- Must appear after a clear uptrend
- First candle is a large green (bullish) candle
- Second candle opens above the first candle's high (gap up)
- Second candle is red (bearish)
- Second candle closes below the midpoint of the first candle's body
- Second candle does not close below the first candle's open
Dark Cloud Cover Example
Stock XYZ has rallied from $80 to $100 over three weeks.
- Day 1: Green candle, opens $98, high $100.50, closes $100
- Day 2: Red candle, opens $101 (above Day 1 high), closes $98.50
- First candle midpoint = ($98 + $100) / 2 = $99
- Second candle closes at $98.50, below the $99 midpoint
- Pattern is valid: Bearish reversal signal
The Psychology Behind Dark Cloud Cover
Understanding the psychology explains why this pattern is so effective:
Day 1: Continued Buying
The uptrend continues with a large bullish candle. Buyers are in control, and bullish sentiment is strong. The large green candle encourages more buying and optimism.
Day 2: Dramatic Reversal
The market opens even higher with a gap up. This initially looks extremely bullish and may trigger excited buying. However, the gap proves to be a trap. Sellers overwhelm buyers throughout the session, driving prices down through the previous day's midpoint. By the close, sellers have erased more than half of the previous day's gains. This dramatic reversal often catches bulls off guard.
Dark Cloud Cover vs Bearish Engulfing
These patterns are similar but have an important difference:
Pattern Comparison
- Dark Cloud Cover: Second candle closes below 50% but above 0% of first candle body
- Bearish Engulfing: Second candle completely covers and exceeds the first candle body
- Signal strength: Bearish engulfing is the stronger signal
- Interpretation: Dark cloud shows strong selling, engulfing shows overwhelming selling
How to Trade Dark Cloud Cover Patterns
Entry Strategies
Conservative Entry
- Wait for the second candle to close
- Enter short on a break below the dark cloud cover low
- Lower risk of false signal
Aggressive Entry
- Enter short near the close of the second candle once the pattern is confirmed
- Better entry price but higher risk
- Requires quick decision-making
Stop Loss Placement
Place your stop loss above the high of the pattern (the high of the second candle, which is also above the first candle). This level represents the invalidation point for the bearish thesis.
Profit Targets
- Target 1: Previous swing low or support level
- Target 2: Measured move equal to the pattern height
- Target 3: Fibonacci extension levels
Factors That Strengthen Dark Cloud Cover
- Deep penetration: The lower the close below the midpoint, the stronger the signal
- Large gap up: A bigger opening gap shows more dramatic reversal
- Volume increase: Higher volume on the second candle confirms seller commitment
- Resistance level: Patterns at key resistance areas are more reliable
- Overbought conditions: RSI above 70 adds confirmation
Real Trading Scenarios
Scenario 1: Dark Cloud at Historical Resistance
A stock rallies to a price level that has acted as resistance multiple times before. A dark cloud cover forms right at this resistance. The combination of proven resistance and the bearish candlestick pattern creates a high-probability short setup.
Scenario 2: Dark Cloud at Round Number
A stock approaches a major round number like $100 or $50. It gaps above on excitement but forms a dark cloud cover as profit-taking kicks in. Round numbers attract selling, making them ideal locations for this pattern.
Scenario 3: Dark Cloud with Bearish Divergence
A stock makes higher highs while RSI makes lower highs (bearish divergence). A dark cloud cover at this point has extra significance because multiple indicators are aligning for a bearish reversal.
Common Mistakes to Avoid
- Close above midpoint: If the second candle does not close below 50% of the first body, it is not a dark cloud cover
- No prior uptrend: The pattern requires an uptrend to reverse
- Missing the gap: The second candle should gap up above the first candle high
- Ignoring confirmation: Wait for follow-through selling before committing
- Fighting the trend: Dark clouds work best at significant resistance, not in strong uptrends
Dark Cloud Cover in Different Markets
Stocks
Dark cloud covers work well in stocks because overnight gaps are common. The gap up followed by reversal is clearly visible on daily charts, especially around earnings or news events.
Futures
Futures markets can gap at the open, making dark cloud covers valid. Look for these patterns at key levels in index futures, especially after extended rallies.
Forex and Crypto
In 24-hour markets, true gaps are rare. Look for modified patterns where the second candle opens near or slightly above the first candle close and still closes below the midpoint.
Risk Management
Proper risk management is essential when trading dark cloud covers:
- Position sizing: Risk no more than 1-2% of your account per trade
- Stop placement: Above the pattern high, with buffer for noise
- Risk-reward: Target at least 2:1 reward to risk
- Partial exits: Consider taking profits at first support, trailing remainder
Track Your Dark Cloud Cover Trades
Pro Trader Dashboard helps you categorize and analyze trades by pattern type. See your performance on dark cloud cover setups and discover what makes your winning trades successful.
Summary
The dark cloud cover is a powerful two-candle bearish reversal pattern that appears at tops of uptrends. The key requirement is that the second candle must close below the midpoint of the first candle's body after gapping up above its high. Look for dark cloud covers at resistance levels, confirm with volume and overbought indicators, and use stops above the pattern high for proper risk management.
Learn the bullish counterpart in our piercing pattern guide or explore evening star patterns.