The dark cloud cover is a powerful bearish reversal candlestick pattern that signals a potential end to an uptrend. When this two-candle pattern appears at the top of a rally, it warns traders that selling pressure is entering the market. In this guide, we will cover how to identify, confirm, and trade the dark cloud cover pattern.
What is the Dark Cloud Cover Pattern?
The dark cloud cover is a two-candlestick bearish reversal pattern that forms after an uptrend. It gets its name because the second candle "covers" the first candle like a dark cloud, suggesting that the bullish sentiment is being overshadowed by bearish pressure.
Pattern structure: The first candle is a strong bullish (green) candle continuing the uptrend. The second candle opens above the first candle's high (gap up) but closes below the midpoint of the first candle's body, creating the dark cloud effect.
How to Identify the Dark Cloud Cover
To properly identify this pattern, look for these specific characteristics:
- Prior uptrend: The pattern must appear after a clear upward move
- First candle: A long bullish candle showing strong buying momentum
- Gap up open: The second candle opens above the first candle's high
- Bearish close: The second candle closes below the midpoint of the first candle
- Penetration depth: The deeper the second candle penetrates, the stronger the signal
Why the Dark Cloud Cover Works
The psychology behind this pattern is straightforward:
- Day 1: Bulls are in control, pushing prices higher with confidence
- Day 2 open: Bulls continue overnight, causing a gap up at the open
- Day 2 close: Bears overwhelm bulls, pushing price down significantly
- Result: Traders who bought on day 1 are now underwater, creating selling pressure
Dark Cloud Cover Example
Stock XYZ is in an uptrend at $50. On Monday, it rallies from $50 to $54 (strong green candle). On Tuesday, it gaps up and opens at $55, but sellers take over, pushing the price down to close at $51.50. Since $51.50 is below the midpoint of Monday's candle ($52), this forms a valid dark cloud cover pattern.
How to Trade the Dark Cloud Cover
Entry Strategies
- Aggressive entry: Enter short at the close of the second candle
- Conservative entry: Wait for a third candle to confirm by closing lower
- Pullback entry: Wait for a small bounce to the second candle's open area
Stop Loss Placement
- Place your stop loss above the high of the pattern (the second candle's high)
- This level represents the point where the pattern would be invalidated
Profit Targets
- Target 1: The low of the pattern formation area
- Target 2: Previous support levels
- Target 3: 1:2 or 1:3 risk-reward ratio from entry
Confirmation Signals
Increase your probability of success by looking for these confirmations:
- Volume: Higher volume on the second candle adds conviction
- Resistance level: Pattern forming at known resistance is more reliable
- Overbought RSI: RSI above 70 supports the bearish reversal
- Third candle: A bearish third candle confirms the reversal
Dark Cloud Cover vs Similar Patterns
Dark Cloud Cover vs Bearish Engulfing
The bearish engulfing pattern is stronger because the second candle completely engulfs the first candle's body. In the dark cloud cover, the second candle only penetrates past the midpoint. Both are bearish, but the engulfing pattern typically leads to larger moves.
Dark Cloud Cover vs Evening Star
The evening star is a three-candle pattern with a small-bodied middle candle (often a doji). The dark cloud cover is a two-candle pattern. Both signal bearish reversals, but they have different structures.
Common Mistakes to Avoid
- Insufficient penetration: The second candle must close below the midpoint of the first
- No prior uptrend: The pattern needs context; it must follow an uptrend
- Ignoring volume: Low volume patterns are less reliable
- Trading in isolation: Always consider support/resistance and other factors
Pro tip: The deeper the penetration of the second candle into the first candle's body, the more bearish the signal. If the second candle closes near the open of the first candle, it is an especially strong reversal signal.
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Summary
The dark cloud cover is a reliable bearish reversal pattern that forms when a strong uptrend is met with sudden selling pressure. The key requirements are a prior uptrend, a gap-up open on the second day, and a close below the midpoint of the first candle. Use confirmation signals like volume, resistance levels, and follow-through to increase your trading success.
Want to learn the bullish counterpart? Check out our guide on the piercing line pattern or explore more continuation patterns.